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Discover five clear steps to understand and implement a strategy for rebalancing your portfolio for financial health.

5 Steps to Rebalance Your Portfolio

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

Step 1: Understand Your Asset Allocation

The first crucial step in how to rebalance your portfolio involves understanding your original asset allocation. When you first set up your investment accounts, you likely determined a specific mix of asset classes, such as stocks, bonds, and cash, based on factors like your risk appetite, time horizon, and financial goals.

For instance, you might have decided on a 60% allocation to stocks and a 40% allocation to bonds. This initial allocation serves as your benchmark.

Before you can rebalance your portfolio, you need to revisit this original plan and clearly understand your target percentages for each asset class. Having a clear picture of your ideal asset mix is essential for making informed decisions in the subsequent steps of the rebalancing process.

Step 2: Assess Current Portfolio Holdings

Once you have a firm grasp of your target asset allocation, the second step is to assess your current portfolio holdings. Take a close look at how your investments have performed since you last reviewed them.

You'll likely find that some asset classes now represent a larger percentage of your overall portfolio than initially intended, while others make up a smaller portion. For example, if the stock market has experienced significant growth, your stock holdings might now account for 70% of your portfolio, while your bond holdings have shrunk to 30%.

This deviation from your target allocation is the trigger for considering a portfolio rebalancing strategy. Understanding the current weight of each asset class is a necessary precursor to making any adjustments.

Step 3: Determine Rebalancing Thresholds

The third step in the process of how to rebalance your portfolio is to determine your rebalancing thresholds. It’s generally not practical or necessary to rebalance every time your portfolio deviates slightly from its target.

Instead, you should establish acceptable ranges or thresholds for each asset class. For example, you might decide to rebalance only when an asset class deviates by more than 5% from its target allocation. So, if your target for stocks is 60%, you would only consider rebalancing if your stock allocation rises above 65% or falls below 55%.

Setting these thresholds helps to avoid excessive trading and keeps your rebalancing efforts focused on significant deviations that could impact your portfolio's risk and return profile.

Updated May 18th, 2025

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Step 4: Take Action to Realign Your Portfolio

With your target allocation and rebalancing thresholds in mind, the fourth step involves taking action to bring your portfolio back into alignment. This typically involves selling some of the overweighted assets and buying more of the underweighted ones.

In our previous example, if your stock allocation has grown to 70% and your bond allocation has fallen to 30% (and your threshold is 5%), you would sell some of your stock holdings and use the proceeds to purchase more bonds.

This process helps to lock in some of the gains from your best-performing assets and ensures that your portfolio remains aligned with your desired risk level. When deciding which specific assets to buy or sell within each asset class, consider factors like tax efficiency and transaction costs.

Step 5: Establish a Regular Rebalancing Schedule

Finally, the fifth step in how to rebalance your portfolio is to establish a schedule for regular review and rebalancing. Market conditions are constantly changing, so it’s important to make portfolio rebalancing a recurring part of your investment strategy.

Many investors choose to rebalance annually or semi-annually. However, the optimal frequency can depend on your individual circumstances and the volatility of the market. Setting a consistent schedule ensures that you don’t let your portfolio drift too far from its intended allocation for too long.

Remember that rebalancing your portfolio is not a one-time event but an ongoing process that helps you stay disciplined and focused on your long-term financial goals.

By following these five steps, you can effectively rebalance your portfolio and navigate the inevitable fluctuations of the market with greater confidence.

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By Jordan McCaleb, Investment Researcher