How Often Should I Rebalance My Portfolio?

As you navigate retirement, keeping your investment portfolio aligned with your goals becomes increasingly important. Market swings can shift your asset mix over time, potentially increasing your risk exposure or limiting your growth potential. That’s where portfolio rebalancing comes in: the process of adjusting your investments back to their intended allocation.

Here’s a breakdown of what rebalancing means, how often you should do it, and more tips to consider.

What Is Portfolio Rebalancing?

Portfolio rebalancing is the act of moving your investments back to their original target allocation between asset classes, including stocks, bonds, and cash equivalents. Over time, the market’s ups and downs can cause your portfolio to drift away from that balance.

Example:
Suppose you start with a 60/40 portfolio — 60% stocks and 40% bonds. After a strong year for the stock market, your portfolio might shift to 70% stocks and 30% bonds. While your portfolio may have grown, it’s now riskier than you intended. Rebalancing would mean selling some of your stock holdings and using that money to buy more bonds until you’re back to 60/40.

The goal of rebalancing is not to chase returns, but to maintain discipline and manage risk so that your portfolio stays consistent with your long-term plan.

Is Portfolio Rebalancing a Good Idea?

In nearly all cases, yes. Rebalancing helps ensure that your portfolio doesn’t become too risky during market booms or too conservative during downturns. Here are a few reasons why it’s beneficial:

Maintains your risk level: Without rebalancing, an extended stock rally could leave you with far more risk than you’re comfortable with, making you vulnerable in a market decline.
Encourages buying low and selling high: Rebalancing forces you to sell assets that have increased in value and buy those that have lagged, which is a disciplined approach to long-term investing.
Reduces emotional decisions: Many investors are tempted to chase trends or panic during volatility. A rebalancing strategy keeps you focused on your plan rather than short-term noise.

That said, rebalancing too often can lead to unnecessary transaction costs or taxes. The key is to strike the right balance: readjust often enough to stay aligned with your goals, but not so often that you undermine your returns.

How Often Should You Rebalance Your Portfolio?

There’s no one-size-fits-all answer, but it’s usually best to review your allocation at least once or twice a year. The right frequency depends on your portfolio size, account types, and tolerance for drift.

Here are a few common approaches:

Calendar-based rebalancing: Adjust your portfolio on a fixed schedule — for example, every six or twelve months. This keeps the process consistent and easy to manage.
Threshold-based rebalancing: Rebalance only when your portfolio drifts a certain percentage away from your target allocation. For instance, if your 60/40 mix becomes 65/35 or 55/45, it could be time for a rebalance.

For many retirees, combining the two approaches works best — review your allocation annually, but also make adjustments if large market movements occur between reviews.

If you’re working with a fiduciary financial planner, they’ll often handle rebalancing for you automatically or recommend changes as part of your ongoing investment management.

What Is the 5/25 Rule for Rebalancing?

The 5/25 rule is a popular threshold-based strategy used by many investors. It states that:

For major asset classes (like stocks or bonds), rebalance if the allocation drifts more than 5 percentage points from the target.
For smaller asset classes (like international stocks or REITs), rebalance if the allocation changes by 25% of its target percentage.

Example:

If your target is 60% U.S. stocks, you would rebalance if that figure rose above 65% or fell below 55%.
If your target is 10% international stocks, you would rebalance if it rose above 12.5% or dropped below 7.5%.

The 5/25 rule provides a clear, disciplined framework that avoids overtrading while keeping your portfolio on track.

Can I Rebalance My Portfolio Without Selling?

Yes, in some cases, you can rebalance without selling investments, especially if you’re mindful about where you direct new money.

Here are a few ways to do it:

Use new contributions: Direct new deposits into underweighted asset classes rather than selling existing holdings.
Redirect dividends and interest: Have dividends or interest automatically reinvested into the parts of your portfolio that need a boost.
Withdraw strategically: For retirees drawing income, sell from overweighted assets when taking distributions.

These methods help maintain your target mix while minimizing capital gains taxes or transaction costs. However, when allocations drift significantly, selling and buying may still be necessary to restore balance fully.

Portfolio Balancing, Retirement Planning, and More in Red Bank, NJ

Portfolio rebalancing is a key part of disciplined investing, especially for retirees who rely on their portfolios for long-term income. Regularly reviewing and adjusting your investments ensures that your risk level stays consistent with your goals, no matter what the market does.

If you’re unsure how often to rebalance or which approach makes the most sense for your situation, contact Zynergy Retirement Planning. We can help design a customized strategy that fits your goals, risk tolerance, and time horizon.