If you’ve taken the time to decide on a target asset allocation—the mix of stocks, bonds, and cash in your portfolio—you’re probably ahead of many investors. But there’s a catch. Unless you’re investing in a truly set-and-forget investment option like a robo-advisor or a target-date fund, your portfolio’s asset mix will shift over time as the market waxes and wanes. If stocks are in a bull market, for example, you might end up with more equity exposure than you planned on. The reverse could be true if the market suffers a big drop.
The process of rebalancing involves selling assets that have appreciated the most and using the proceeds to shore up assets that have fallen behind. By doing so, you can bring your portfolio’s asset mix back into balance. It’s also a way to enforce the discipline of selling high and buying low. Rebalancing doesn’t necessarily improve your portfolio’s returns, especially if it means selling asset classes that continue to perform well. But it can be an essential way to keep your portfolio’s risk profile from climbing too high.
Where and How to Rebalance
If it’s been a while since you rebalanced your portfolio, it might be heavy on stocks (which have compounded returns by more than 14% per year, on average, over the past 10 years) and light on bonds. For example, a portfolio that started with a 60% weighting in stocks and 40% in bonds 10 years ago would now contain more than 80% in stocks.
Another area to check is the mix of international versus US stocks. Even though stocks from outside the United States have pulled ahead so far in 2025, that followed on the heels of a long run of outperformance for the US. As a result, your portfolio might still be light on international exposure. (Keeping roughly a third of your equity exposure outside the US is a reasonable target if you want to be in line with the global market portfolio.)
A few other areas might also be out of balance: Growth stocks, for example, have gained nearly twice as much as value stocks over the past three years. More specialized asset classes, such as gold and bitcoin, might also be above your target weightings thanks to their recent runups.
After figuring out which asset classes might be out of balance, the next thing to consider is where to make changes to adjust them. You don’t need to rebalance every account you own. What really matters is the asset mix of the overall portfolio, which ultimately determines the risk and return profile you’ll experience. If you find your asset mix is out of balance, it’s usually most tax-efficient to make adjustments within a tax-deferred account such as an IRA or 401(k). Buying and selling assets within the account won’t lead to any realized capital gains. For example, if your overall portfolio is too heavy on US stocks and light on international stocks, you could sell US equity holdings and buy an international-stock fund within your 401(k)—perhaps with a higher international allocation within the account to help balance out lower international exposure in a taxable account.
If you need to make changes in a taxable account, you can attempt to offset any realized capital gains by selling holdings with unrealized losses. That might be easier said than done, as the generally strong market environment has lifted nearly every type of asset over the past 12 months. Only a handful of Morningstar Categories (including India equity, real estate, consumer defensive, and healthcare) posted losses over the trailing 12-month period ended Oct. 30, 2025. If you’ve owned any long-term government-bond funds for several years, that could be a particularly promising area for harvesting losses. The average fund in the category suffered losses of about 8% per year for the trailing five-year period as of the same date.
Required minimum distributions (the mandatory withdrawals from tax-deferred accounts that start at age 73 for people born between 1951 and 1959) can also be used in tandem with annual rebalancing. Account owners have considerable flexibility when it comes to which assets to sell to meet RMD requirements. If you own several different traditional IRAs, for example, you could take the full RMD amount from any one of them. In general, you’ll want to sell off holdings that have appreciated the most, which can help bring the portfolio’s asset mix back in line with your original targets.
Finally, another option for rebalancing is by funneling new contributions into asset classes that are underweight. Depending on the size of the additional investments relative to the whole portfolio, this approach might take a while. However, it’s better than not rebalancing at all. This approach might also be appealing if you’ve accumulated a lot of capital gains that you’d rather not realize.
Final Thoughts
Rebalancing isn’t equally important in every market environment. It’s arguably more important in extremely volatile times—following a big market drop or a large runup that could quickly put your portfolio’s asset mix out of whack. But even in a more gradual bull market like we’ve seen in recent years, it’s an important step for keeping a portfolio’s risk level in check, especially for investors as they approach retirement and start spending down their portfolios.
