How often should I rebalance my portfolio?
Once a year, or when an allocation drifts more than about five percentage points from its target — and the choice between reasonable rules changes outcomes far less than doing it at all.
RebalancingSelling what has grown and buying what has not, to return a portfolio to its intended mix. Its main effect is risk control rather than extra return: without it, a portfolio drifts towards whatever recently rose.Read the evidence on this → is risk control, not a return strategy. Left alone, a portfolio drifts toward whatever has been rising, which means it becomes most aggressive precisely when valuations are highest. Rebalancing puts it back where you decided it should be.
Across plausible calendar frequencies and tolerance bands, the historical differences are small. That is a genuinely useful finding, because it means the decision does not deserve the attention it gets: pick a rule, write it down, and follow it.
The cheapest implementation is usually not selling at all. Directing new contributions toward whichever holding is below target does most of the work with no transaction costs and no taxable event.
When the answer is different
- In a taxable account, selling to rebalance realises gains. Contribution-based rebalancing and holding tax-inefficient assets in sheltered accounts both reduce how often a sale is needed.
- A tolerance band that is too tight generates trading for its own sake, which costs money and, in a taxable account, tax.
Put your own numbers to it
Every answer here is general. These are not.
- Allocation and risk capacity
How much risk can I take, and how much can I stand?
The research this rests on
Each note states its claim, rates how strong the evidence actually is, and lists the conditions under which it fails.
- Rebalancing controls risk; it is not a source of return
Rebalancing keeps a portfolio's risk near its target, and across plausible calendar frequencies and tolerance bands the choice of rule changes outcomes far less than whether a rule exists at all. (moderate)
- Which account holds which asset changes your return without changing your risk
For an unchanged overall allocation, placing tax-inefficient assets inside tax-advantaged accounts raises after-tax returns, and household portfolios show most people do not arrange their accounts this way. (moderate)
- Fees are the most reliable predictor of returns you control
Across funds and time periods, lower costs predict higher net returns more consistently than any other observable fund characteristic. (strong)
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Rebalancing
- Selling what has grown and buying what has not, to return a portfolio to its intended mix. Its main effect is risk control rather than extra return: without it, a portfolio drifts towards whatever recently rose. Evidence →