If you’ve started investing, congratulations! You’re already taking a significant step toward securing your financial future and building long-term wealth. However, investing isn’t something you can just set and forget. Over time, your portfolio can drift away from its original plan due to changes in the market and the varying performance of your investments. Rebalancing ensures that your investment mix stays aligned with your desired strategy, whether that's maintaining a certain ratio of stocks to bonds or diversifying across different sectors. Without it, your portfolio could become riskier or less efficient than you intended.

Don’t worry if this concept seems unfamiliar or intimidating! Rebalancing isn’t as complicated as it sounds, and we’re here to explain everything you need to know. From understanding why rebalancing matters to learning how and when to do it yourself, this guide will help you keep your investments on track. Whether you’re new to investing or looking to refine your strategy, rebalancing is a critical tool for staying in control of your financial journey.

What Is Portfolio Rebalancing?

Portfolio rebalancing is simply the process of adjusting your investments to get them back in line with your financial goals and risk tolerance. When you first invest, you decide on an allocation—or mix of investments. You might decide you want 70% of your portfolio in stocks and 30% in bonds. Over time, though, some investments (like stocks) might grow faster than others, while others (like bonds) might not grow as much. That 70/30 split could turn into 80/20 without you even noticing.

When this happens, your portfolio may no longer match your original plan. Rebalancing helps you realign everything and keep your investment strategy on track.

Why Is Rebalancing Important?

Skipping rebalancing could expose you to more risk than you’re comfortable with. Using the example above, if your portfolio drifts to 80% stocks, you might experience more significant losses during a market downturn than you’d planned for. On the flip side, if you’re too heavily invested in bonds or cash, your portfolio might grow more slowly than you’d like, which could delay reaching your goals.

Rebalancing brings your investments back into balance, helping you stick to your desired level of risk and ensuring your savings grow the way they should. Think of it like steering a car on a straight road. If you don’t make small adjustments, you might veer off course!

How to Rebalance Your Portfolio in 4 Simple Steps

Rebalancing may sound technical, but it’s actually not as tricky as it seems. Here’s a straightforward step-by-step guide:

1. Review Your Current Allocation

Take a close look at your portfolio to see how much of your money is currently in each type of investment (like stocks, bonds, real estate, or cash). Many brokerage accounts or investment apps will show this breakdown for you automatically. You might see pie charts or percentages of where your money is spread out.

2. Compare It to Your Target Allocation

Next, compare your current allocation to the mix you originally planned. If your target was 70% stocks and 30% bonds, but you now see your portfolio is sitting at 80% stocks and 20% bonds, it’s a sign that you’re due for some rebalancing.

If you’re unsure what your target allocation should be, think about your goals and risk tolerance. Are you saving for something long-term, like retirement, and willing to take on more risk? Or do you want something closer to a balanced, steady growth approach? A general rule is that younger investors can take on more stock exposure for growth, while older investors may want a more conservative mix.

3. Adjust Your Investments

This is where the actual rebalancing happens, but don’t worry, it’s simpler than it sounds. You can:

  • Sell and Buy: Sell some of the investments that have grown too large (like stocks in the above example) and use that money to buy more of the investments that are underweight (like bonds).
  • Add New Contributions: If you’re regularly adding money to your portfolio, you can direct those funds toward the investments that are “lagging” to bring everything back into balance.

For instance, if your stocks have grown too much, you might sell a small portion of your stock investments and buy more bonds to even things out.

4. Repeat Regularly

Rebalancing isn’t a one-and-done task. It’s a good idea to check your portfolio every six months to a year and see if adjustments are needed. Some people prefer a set schedule (like once a year), while others rebalance only when the portfolio drifts a certain amount, such as 5% off target. Either approach works, so pick the one that fits your style best.

Quick Tip for Rebalancing With Minimal Costs

One thing to keep in mind is that rebalancing can sometimes involve fees or taxes, especially if you’re selling investments in a taxable account. To minimize costs, consider rebalancing within tax-advantaged accounts (like IRAs or 401(k)s) or using tax-efficient strategies like targeted contributions instead of sales.

Take a moment soon to check in on your portfolio. Does it match the allocation you originally set up? If not, you now have the tools to rebalance it with confidence. Step by step, you can master the art of investing and watch your financial goals come to life.