What is rebalancing?
Last updated August 2026
Short answer
Every unmanaged portfolio ends up concentrated in whatever has done best recently. That happens automatically, and it is the reason this job exists.
How drift happens
Different holdings grow at different rates, so their shares of the total change continuously.
After several strong equity years, a portfolio set at 70% stocks can sit above 80% while you have done nothing at all.
The drift always increases exposure to whatever recently performed best, which is the exposure most likely to reverse.
Why it is uncomfortable
Rebalancing means selling your best performers to buy the laggards. Every instinct argues against it.
That discomfort is the mechanism. Buying more of what has fallen is how a fixed allocation survives a full cycle.
Deciding by rule rather than by judgment removes the argument, which is why a date or a threshold works better than an opinion.
Calendar or threshold
Calendar rebalancing happens on a fixed schedule, usually once a year. It is simple and easy to keep.
Threshold rebalancing triggers when an allocation moves more than a set distance from target, so it acts when markets actually move rather than when the calendar says so.
Combining them, checking annually and acting only if drift exceeds the threshold, avoids both unnecessary trades and long unattended drift.
Try it in Walnut
Walnut reads your connected brokerage and shows current weights against your targets, so drift is visible before it becomes a decision.
Doing it without a tax bill
Inside a 401(k), IRA or HSA, selling to rebalance creates no taxable event, so the whole job can be done there first.
In a taxable account, direct new money into the underweight asset rather than selling the overweight one.
Switching off automatic dividend reinvestment turns each distribution into cash you can point at whatever has lagged.
What to watch for
Wash sales, if part of the rebalance involves selling at a loss and buying something substantially identical within the 30-day window.
Drift inside an asset class, not only between classes. An equity allocation at exactly 70% can still be concentrated in a handful of companies.
Whether the target still fits. A mix chosen ten years ago may not match a horizon that has shortened by ten years.
A worked rebalance
A $100,000 portfolio set at 70/30 grows to $130,000 with equities at $104,000 and bonds at $26,000, which is 80/20.
Returning to target means equities at $91,000 and bonds at $39,000, so $13,000 moves from stocks to bonds.
In a retirement account that is two trades and no tax. In a taxable account, the cheaper route is to direct the next $13,000 of contributions into bonds and leave the equities alone.
Sources
Allocation, diversification and rebalancing guidance is published by the SEC at investor.gov. Capital gains treatment on sales is in IRS Topic no. 409, and the wash sale rule in Publication 550. Walnut is informational and is not an investment adviser. This guide is educational and not personalized investment or tax advice.
FAQ
What is rebalancing?
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Returning a portfolio to its target mix after markets have moved it. If a 70/30 stock and bond split has drifted to 80/20, rebalancing sells enough equity and buys enough bonds to get back to 70/30.
How often should I rebalance?
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Annually on a fixed date, or whenever an allocation drifts beyond a threshold such as five percentage points, are both defensible. Checking more often mostly generates costs and taxes, and the evidence does not support frequent adjustment.
Does rebalancing improve returns?
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Not reliably. Its purpose is holding risk at the level you chose, and trimming winners can slightly reduce return over long rising periods. The reason to do it is that an unmanaged portfolio drifts into a risk level you never agreed to.
How do I rebalance without triggering tax?
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Direct new contributions into whatever is underweight, take dividends as cash instead of reinvesting them, and do the selling inside retirement accounts where no taxable event occurs. Those three cover most drift without a single taxable sale.
What is drift?
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The gap between your current allocation and your target, created by different holdings growing at different rates. It appears without any action from you and always moves toward whatever has recently performed best.
Should target-date funds be rebalanced?
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Not by you. A target-date fund rebalances internally and shifts its mix over time, which is the product. Holding one alongside other funds, however, means your overall allocation still drifts and still needs checking.
Can you show a rebalance in numbers?
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A $100,000 portfolio at 70/30 that grows to $130,000 with $104,000 in equities is now 80/20. Returning to target means $91,000 equities and $39,000 bonds, so $13,000 moves. In a taxable account, directing the next $13,000 of contributions to bonds does the same job without a sale.
Should I rebalance during a crash?
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That is when the rule earns its keep, because after a fall the equity share is below target and the rule says buy. Doing it on a schedule set in advance is what makes the action possible at the moment it feels worst.
What if my target allocation was wrong to begin with?
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Then change the target rather than skipping the rebalance. Those are separate decisions: one is about what mix suits your horizon and tolerance, the other is about keeping the portfolio at whatever mix you chose. Conflating them turns every rebalance into a fresh argument about strategy.