Rebalancing is the process of buying or selling holdings to bring a portfolio back to its original target mix of asset categories, such as stocks, bonds, and cash, after market movements have shifted those proportions away from plan.
What Does Rebalancing a Portfolio Mean?
Rebalancing means restoring a portfolio to a previously chosen asset allocation — the division of a portfolio among asset categories such as stocks, bonds, and cash. According to the U.S. Securities and Exchange Commission's investor-education guide on asset allocation, an investor first sets a target mix based on time horizon and risk tolerance, then periodically checks whether actual holdings still match that mix.
The same SEC guide describes rebalancing as "bringing your portfolio back to your original asset allocation mix" and recommends investors do it "at least once a year," typically every six to twelve months, to prevent any single asset category from becoming an outsized share of the total. The guide frames this as one tool among several for managing risk, not a guarantee against loss.
Rebalancing is distinct from diversification, which is the practice of spreading money across different investments to reduce concentration in any one holding. A portfolio can be diversified and still drift out of balance over time as its components grow at different rates.
Why Does an Allocation Drift From Its Target?
An allocation drifts because asset classes grow at different rates. A portfolio set at 60% stocks and 40% bonds will hold a larger stock share after a period in which stocks outperform bonds, and a smaller one after stocks underperform. Left unchecked, the drift compounds each period.
Investor.gov, the SEC's investor-education site, explains diversification with the shorthand "don't put all your eggs in one basket": spreading money across assets with different risk and return characteristics can offset losses in one holding with gains in another. The site notes this reduces the severity of losses in a downturn but does not prevent them — a distinction rebalancing does not change.
Over multiple years without intervention, drift can leave a portfolio meaningfully more concentrated in higher-volatility assets than the investor originally chose, changing the portfolio's risk profile without any deliberate decision to take on more risk.
How Is Rebalancing Different From Diversification and Allocation?
Diversification, allocation, and rebalancing are three related but distinct steps, and conflating them is a common source of confusion. Allocation is the initial decision about how to divide money among categories. Diversification is the practice of spreading holdings within and across those categories to avoid concentration in any single investment.
Rebalancing is the maintenance step that comes after both: it does not change the target allocation or the diversification strategy, only the actual weights of what is already held, so that they continue to match the plan set at the outset. A portfolio can be well diversified — holding many individual securities — and still be out of balance if one category has grown to dominate the total.
For a related explanation of when investors use rebalancing, read How Portfolio Rebalancing Works and When Investors Use It.
For more context, read How Portfolio Rebalancing Works and When Investors Use It.
For more context, read How Portfolio Rebalancing Works, and What It Actually Fixes.
