You chose 60% stocks, 30% bonds and 10% cash. A year later, stocks are more than 65% of the account. You haven't bought a share or changed your mind about risk. The mix changed anyway.
A rising balance can hide a growing bet on stocks. The question is whether you still hold the risk mix you chose. Rebalancing brings those proportions back under your control.
Doing nothing changes the weights
Allocation drift means your investments' proportions have moved away from their targets. Rebalancing brings them back toward the chosen mix. Changing the target because your goals or circumstances changed is a separate asset allocation decision.
Suppose you start with $100,000: $60,000 in stock funds, $30,000 in bond funds and $10,000 in cash. The examples use nominal US dollars before fees and taxes, with no deposits, withdrawals or distributions during the year's price changes.
Over that year, say stocks gain 25% while bonds and cash stay flat. Stocks become $60,000 × 1.25 = $75,000. The new portfolio total is $75,000 + $30,000 + $10,000 = $115,000.
The stock weight is $75,000 ÷ $115,000 = about 65.2%. Bonds are 26.1%; cash is 8.7%. Bonds and cash haven't lost dollars. They have lost a share of the total.
The purpose is to manage portfolio risk. If stocks keep outpacing bonds and cash, moving money out of them hurts relative returns. A rebalance can do its job without winning the return contest.
Choose when to look and when to act
A review is an appointment. A rebalance is a decision.
A rebalancing band sets boundaries around a target. Calendar rebalancing uses a schedule, threshold rebalancing responds to a boundary, and hybrid rebalancing combines them:
| Rule | Review | Trigger | Trade-off |
|---|---|---|---|
| Calendar | Set dates | Any drift | Even tiny gaps |
| Threshold | Ongoing | Band edge | More checks |
| Hybrid | Set dates | Band edge | Drift can linger |
For this example, the rule is to review quarterly and act when stocks are at or below 55%, or at or above 65%. Those boundaries sit five percentage points either side of the 60% target.
A 5% relative change gives a different band: 5% of 60% is three percentage points, so the boundaries would be 57% and 63%.
The 65.2% stock weight triggers action at the review. Quarterly checks are easy to schedule, but drift can grow between them. The band tells you when to act; the target tells you where to aim.
Restore the mix with the least friction
At the new $115,000 total, the 60% stock target is $69,000. Work out the other targets the same way:
| Asset | Now | At target |
|---|---|---|
| Stocks | $75,000 | $69,000 |
| Bonds | $30,000 | $34,500 |
| Cash | $10,000 | $11,500 |
A full rebalance sells $6,000 of stocks, buys $4,500 of bonds and leaves $1,500 more in cash. The total stays $115,000.
New money offers another route. Your regular contributions can go toward the assets below target. The same method works for a smaller portfolio.
Your stock dollars haven't shrunk. The portfolio around them has grown.
For the larger portfolio, $10,000 of new savings does the same job: $7,500 into bonds and $2,500 into cash. The new $125,000 total holds $75,000 in stocks, $37,500 in bonds and $12,500 in cash, again 60/30/10.
Only $100 available for the smaller portfolio? Adding $75 to bonds and $25 to cash lowers the stock weight to $1,500 ÷ $2,400 = 62.5%. All three weights move closer to target. Stocks are inside the band, but still above 60%.
Return to the $2,300 portfolio. A $100 withdrawal funded by selling stocks leaves $1,400 in stocks out of $2,200, or about 63.6%. Withdrawals shrink the denominator, too.
Buying bonds with cash already inside the portfolio, including retained dividends, does not increase the total. It changes what you own inside it.
Check the bill before the trade
The SEC's rebalancing guide flags transaction costs and taxes. Check spreads and any fund transaction fees before paying to close a tiny gap. A tidy percentage isn't worth any price.
For a plan spanning several accounts, measure all its holdings together before choosing where to trade. Moving money between those accounts adds nothing to the combined total.
A falling weight cannot tell you whether a business is worth owning. Before adding to an individual stock, check whether the reason for owning it still holds.
Stopping at 62.5% stocks accepts some extra stock exposure to avoid further sales. A rule allowing that partial rebalance belongs in your written policy, alongside the review dates and bands.
The sequence has an early exit: under this rule, a review inside the stock band ends without a rebalance.
New deposits can restore weights and lift your balance at the same time. Measuring returns separates that added money from investment gains.
In short
- Market moves change your risk mix even when you make no trades.
- A review date tells you when to look; a band tells you when to act.
- New money changes the total. Recompute the weights before deciding where it goes.
- Getting inside a band and getting back to target are different stopping points.
- Rebalancing manages risk; it does not promise higher returns.