How to Rebalance a Portfolio Once a Year

Learn when and how to rebalance your investment portfolio annually to maintain your target asset allocation.

1. Check your current allocation against your target. Log into your investment accounts and add up what percentage of your total portfolio is in each asset class. Compare this to your target allocation — for example, if you planned for 70% stocks and 30% bonds, but you're now at 75% stocks and 25% bonds, you're 5 percentage points off target.
2. Decide if rebalancing is worth the effort. Only rebalance if any asset class is more than 5 percentage points away from your target. Smaller drifts aren't worth the transaction costs and tax implications. If your target is 60% stocks but you're at 58% or 62%, leave it alone.
3. Start with new contributions before selling anything. If you're adding money to your portfolio anyway, direct new contributions toward the underweight asset classes first. This avoids selling existing investments and potentially triggering taxes. Only move to selling and buying if new money isn't enough to get back on track.
4. Sell high and buy low to restore balance. Sell portions of the asset classes that are over their target weight and use that money to buy more of what's under target. Focus on tax-advantaged accounts first to avoid capital gains taxes. In taxable accounts, consider tax-loss harvesting opportunities when selling.
5. Set a calendar reminder for next year. Mark your calendar to check your allocation again in 12 months. Some investors prefer rebalancing on their birthday or at year-end for simplicity. Avoid checking more frequently — constant tweaking based on short-term market moves defeats the purpose.