Start with your portfolio’s intended target allocation and its current weights—not with the market’s latest move. If your goals, time horizon, financial circumstances, and comfort with risk still support that target, rebalancing means bringing the portfolio back toward its planned mix. A decline alone does not show that the plan should change, and rebalancing is not a forecast that prices will recover on a particular schedule.
First decide whether your target allocation still fits
Rebalancing and changing your investment plan are different decisions. Rebalancing restores a chosen mix after market movements shift the relative weights of holdings. Changing the target means revisiting the plan itself.
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Before trading, ask whether your investment goal, time horizon, financial situation, or tolerance for risk has changed. Those circumstances can justify reviewing an allocation. A category’s recent performance—good or bad—does not by itself establish that you should change your target or chase what has recently done best. The SEC’s beginner guide describes rebalancing as a way to restore the intended mix.
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Measure how far the portfolio has drifted
Compare the current percentage in each asset category with the corresponding percentage in your chosen target. Use the same categories in both calculations; for example, compare stocks with the stock target and bonds with the bond target. Your account statement or investment platform may show current values, but check how it classifies holdings before relying on category totals.
Illustration, not a recommended allocation: The SEC describes a hypothetical portfolio whose stock allocation began at 60% and rose to 80% after market gains. That example shows how performance can change weights; it is not a target or recommendation for an individual reader. After a decline, weights may shift in a different direction, depending on which holdings fell and by how much.
Write down the target weights and current weights before deciding what to do. This makes the size and direction of any drift visible without assuming that a particular asset will rebound.
Choose a way to move toward the target
The SEC and FINRA describe three general methods for rebalancing. Which is practical depends on whether you have cash or ongoing contributions, whether trades would require sales, and the costs and tax consequences that may apply to your account. No method is best for every investor.
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| Method | Cash or contributions available? | Are sales required? | Costs and tax considerations | How it relates to the target and review rule |
|---|---|---|---|---|
| Use new money to buy underweight categories | Requires cash available to invest. | Not necessarily; purchases can add to underweight categories. | Purchases may involve transaction fees; account and tax implications depend on circumstances. | Can move weights toward the existing target when a review rule indicates action. |
| Direct ongoing contributions to underweight categories | Requires contributions to be continuing or planned. | Not necessarily; contributions can be directed without selling overweight holdings. | Check any transaction fees and applicable account rules. | Can gradually address drift while following the chosen target and review rule. |
| Sell overweight assets and buy underweight categories | New cash is not required for the exchange, though cash flows may still be considered. | Yes, this method includes selling overweight assets. | Selling can involve transaction fees and tax consequences; the result depends on the account and applicable rules. | Directly adjusts the mix toward target when the chosen review rule calls for rebalancing. |
The descriptions of these approaches come from the SEC beginner guide and the SEC and FINRA investor bulletin. The bulletin is dated December 6, 2012; its general description of rebalancing methods is useful here, but its historical year-end tax-rate discussion is not current tax guidance.
Set a review rule instead of reacting to every move
You can review on a calendar schedule or use a threshold chosen in advance: review when a category’s weight moves far enough from its target to cross that threshold. A calendar review checks the mix at set intervals; a threshold rule ties a review to allocation drift. Neither approach requires you to respond to every market swing.
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The SEC says rebalancing tends to work best relatively infrequently and does not prescribe one universal schedule or threshold. Choose a rule consistent with your plan and circumstances. The purpose is to bring weights back toward the target when your rule calls for it, not to predict short-term market direction.
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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errorsCheck fees, taxes, and account rules before trading
Before placing a sale or purchase, check for transaction fees and consider possible tax consequences. The applicable treatment depends on your account, location, and individual circumstances; a general guide cannot calculate your tax result. The SEC and FINRA bulletin also flags these considerations, but its 2012 tax discussion should not be used as current tax advice.
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If the potential tax or fee implications are unclear, consult a qualified financial professional or tax adviser before trading. Do not assume that a trade has the same consequences in every account or jurisdiction.
Consider whether a target-date fund fits your situation
A target-date fund is one possible managed alternative: it adjusts its allocation over time. That does not make every such fund suitable for every investor. Review the fund’s stated goal, glide path, holdings, and fees in current fund documents, and consider whether its approach fits your circumstances.
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