Understanding when and how to rebalance your portfolio

How to rebalance portfolio

Your investment strategy is probably designed for the long term, with a diversified mix of various types of investments. But there are times when you should consider portfolio rebalancing.

For instance, it may be time to review your portfolio and consider rebalancing your investment mix if:

When your investment goals, time horizon and tolerance for risk changes, you can rebalance your portfolio to restore the asset allocation you want. Just keep in mind that the use of asset allocation doesn’t guarantee returns or protect you from potential losses.

Understanding how portfolio rebalancing works

Say the stock market gains over the past three years have swollen the stocks portion of your portfolio. If the current level is too high for your risk tolerance, you can return to your original allocation.

How do you do this?

Hypothetical portfolio rebalancing example

Three years after Karen invested her money in three different asset classes, gains in the stock market increased the value of her stock funds 22%. During the same period, the value of her bond funds grew 9% and her money market fund value was up 4%.

Original Mix

Current Mix
(3 years later)

Rebalanced Mix

$55,000 Portfolio

$63,828 Portfolio

$63,828 Portfolio









Money Market




At the end of three years, the percentage of stocks in Karen’s portfolio went from 60% to 63.1%. She wasn’t comfortable with a level of investment risk that high, so she decided to return her asset allocation to the original percentages.

She did it by selling shares in her stock funds and buying additional shares in bond and money market funds.1

The information in this chart is hypothetical and used for illustration purposes only. It is not intended to predict the actual performance of any particular investment. The effect of taxes and the costs of investing have not been reflected.

Some investments offer automatic rebalancing

Depending on the type of investment, rebalancing can be regular and automatic. For example, funds known as asset allocation funds split their investment assets among stocks, bonds and cash. Rebalancing becomes automatic in order to stay within the portfolio’s objectives and risk parameters.

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