In investing, there’s a popular saying: “Time in the market beats timing the market.” It’s true — long-term consistency is often more powerful than chasing short-term trends. But there’s one important caveat many investors overlook: doing absolutely nothing can still cost you.
Markets move, asset classes shift, and risk levels evolve. A portfolio that started perfectly balanced can drift far from your intended strategy in just a few years. This is where portfolio rebalancing — the act of realigning your investments back to target allocations — becomes crucial.
It’s not as exciting as stock-picking or market forecasting, but rebalancing is one of the most underrated wealth-preserving strategies every investor should understand.
The Drift: How Your Portfolio Changes Without You
Let’s start with a simple example. Imagine you invested €10,000 in January 2020 — 60% in stocks and 40% in bonds. Fast-forward to the end of 2024: stocks have risen by an average of 10% per year, while bonds have delivered a modest 2%.
Without touching your portfolio, your allocation now looks like this: roughly 70% in stocks and 30% in bonds.
That might not sound like a big deal, but it’s a significant shift in risk. What started as a moderate portfolio has quietly transformed into an aggressive one — meaning a market correction could now hit much harder than you intended.
According to Vanguard research, portfolios left unbalanced for five years can see their risk levels (measured by volatility) increase by 20–25%, even if overall returns stay similar. That kind of hidden risk can derail long-term financial plans.
The Purpose of Rebalancing: Risk, Not Return
Many investors think rebalancing is about boosting returns, but it’s really about controlling risk.
By periodically selling assets that have grown and buying those that have lagged, you maintain your desired risk/reward ratio. Over time, this disciplined approach prevents your portfolio from becoming overexposed to hot sectors — or underexposed to undervalued ones.
For instance, during the tech boom of the late 1990s, portfolios overweighted in technology soared — until the Dot-com crash of 2000, when Nasdaq stocks fell by nearly 80%. Investors who had regularly rebalanced avoided the worst of the downturn, while those who “let it ride” saw years of gains wiped out.
In fact, a Morningstar study found that between 2000 and 2020, a 60/40 portfolio rebalanced annually outperformed an unrebalanced version by 0.4% per year, with lower volatility. That may sound small, but compounded over decades, it’s the difference between good outcomes and great ones.
When and How Often Should You Rebalance?
There’s no one-size-fits-all answer — the right rebalancing schedule depends on your goals, risk tolerance, and market conditions. But there are two main approaches most investors use:
- Calendar-based rebalancing: You adjust your portfolio at regular intervals — usually annually or semi-annually.
- Threshold-based rebalancing: You act only when allocations drift beyond a set range — say, 5% or more from your target weights.
Studies by Fidelity and Charles Schwab suggest that rebalancing once or twice a year strikes the best balance between performance and transaction costs. More frequent adjustments tend to add little value, while ignoring your portfolio for too long can cause risk creep.
If you invest through a robo-advisor or index fund platform, these systems often automatically rebalance for you — a feature worth taking advantage of if you prefer a hands-off approach.
The Psychological Trap: Why Investors Avoid Rebalancing
Ironically, rebalancing goes against human nature. Selling what’s done well (like stocks after a rally) and buying what’s underperformed (like bonds after a dip) feels wrong. It’s a psychological bias known as recency effect — we expect what just happened to keep happening.
But successful investing requires discipline, not emotion.
A Dalbar study tracking investor behavior found that the average equity fund investor underperformed the S&P 500 by 1.7% annually over 30 years — largely because they failed to stick to consistent, rules-based strategies like rebalancing.
When you rebalance, you’re essentially doing what great investors preach: buying low, selling high, and staying aligned with your goals instead of chasing the market’s mood swings.
Tax and Cost Considerations
Rebalancing isn’t free — especially for taxable accounts. Selling appreciated assets can trigger capital gains taxes, and frequent trading can lead to unnecessary transaction costs.
That’s why it’s often best to rebalance within tax-advantaged accounts (like IRAs or pension plans) or use new contributions and dividends to rebalance passively. For example, if stocks have grown too much, direct your next few contributions toward bonds instead of selling stocks outright.
This approach, sometimes called “cash flow rebalancing,” minimizes taxes while keeping your portfolio on track.
The Hidden Benefit: Better Sleep at Night
One of the most overlooked benefits of rebalancing is peace of mind. A portfolio that drifts too far can become emotionally unmanageable. When volatility spikes, overexposed investors panic; balanced ones stay calm.
During the 2020 market crash, diversified investors who stuck to disciplined rebalancing were able to recover faster. According to JP Morgan Asset Management, portfolios that rebalanced in 2020 outperformed non-rebalanced ones by 2.3% over the following 18 months — largely because they bought equities near the bottom.
In other words, rebalancing doesn’t just protect your portfolio — it protects your psychology.
Turning Rebalancing Into a Habit
Like healthy eating or regular exercise, portfolio rebalancing works best when it’s routine. Set a calendar reminder once a year to review your allocations, or automate the process through your investment platform.
When rebalancing, consider not just stocks and bonds but also other asset classes — real estate, commodities, international equities, and cash reserves. The goal is to keep your portfolio aligned with your financial plan, not market trends.
Staying Balanced in Every Sense
Rebalancing is the quiet, methodical side of wealth-building — the unglamorous habit that keeps emotions in check and risk under control. It doesn’t make headlines or generate instant profits, but over decades, it’s one of the most powerful drivers of stability and long-term success.
Because in the end, investing isn’t about constant action — it’s about consistent balance. The difference between the investors who thrive and those who merely survive often comes down to one simple habit: knowing when to do something instead of nothing.
