Direct answer
What is portfolio rebalancing and why do investors do it?
Rebalancing means bringing your portfolio back to the target mix you chose. Markets move some investments up and others down, so over time a 60/40 portfolio drifts toward the winners. A rebalance sells a little of what grew and buys a little of what fell, so your risk stays close to the plan instead of drifting with the market.
The problem: drift
When one part of your portfolio grows faster than another, its share of the total grows too. That is drift. It is not a mistake — it is what markets do — but it quietly changes the risk of the portfolio.
What a rebalance does
A rebalance compares current holdings with target percentages, then produces a simple list: sell what is overweight, buy what is underweight. The goal is to return to the target mix, not to bet on what will go up next.
- Sell overweight positions
- Buy underweight positions
- Keep the total invested amount the same
- Use fractional shares so the list can match the target closely
How often
Common approaches are calendar-based (every 3–6 weeks, quarterly, or yearly) or threshold-based (rebalance when any position drifts more than a set amount). A fixed schedule is simpler and removes the temptation to react to headlines.
- Every 15, 21 or 30 trading days
- Quarterly or yearly
- When drift passes a threshold you set
- After a large contribution or withdrawal
Limits
- Rebalancing does not improve a bad target mix.
- More frequent rebalancing can mean more trading costs and taxable events.
- A rebalance is a plan for your account, not a prediction about markets.
Common questions
Questions about this workflow
Does rebalancing mean I am selling my winners?
Sometimes yes. Rebalancing sells what is overweight to buy what is underweight. That is the point: it enforces the risk you chose instead of letting the market decide.
Is rebalancing the same as market timing?
No. Market timing tries to predict the next move. Rebalancing ignores predictions and simply returns the portfolio to its target.