Start with your portfolio’s intended allocation—not with the market’s latest move. A sharp decline does not, by itself, mean your long-term target should change. First check whether your goal, time horizon, financial circumstances, or comfort with risk has changed. If the target still fits, rebalancing means bringing your current holdings closer to that target, not predicting when markets will recover.
What rebalancing does—and what it does not do
Rebalancing restores the mix of asset categories you chose for your portfolio after market movements have changed their relative weights. The SEC describes it as “bringing your portfolio back to your original asset allocation mix” in its Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing.
It is distinct from deciding on a new long-term allocation. A decline may change the portfolio’s current weights, but it does not automatically change the reasons you selected the target. Nor does rebalancing guarantee a gain, prevent further losses, or establish that an asset whose price has fallen will recover. “Buy low, sell high” describes the discipline of adjusting toward a chosen mix; it is not a promise about future performance.
Step 1: Check whether your target still fits
Before trading, revisit why you chose the portfolio’s target allocation. Consider whether anything important has changed in:
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- Your goal: Is the money still intended for the same purpose?
- Your time horizon: Has the date you expect to need the money moved closer or farther away?
- Your financial circumstances: Have your income, obligations, or ability to absorb losses changed?
- Your comfort with risk: Does the current plan still reflect the level of fluctuation you can tolerate?
The SEC’s guide explains that allocation can change when an investor’s goals or circumstances change. It also cautions against changing allocation simply because asset categories have recently performed relatively well or poorly. The appropriate target is personal; this guide cannot prescribe a stock-and-bond mix or determine whether yours is suitable.
Step 2: Measure how far the portfolio has drifted
Compare the current percentage in each asset category with the target percentages in your plan. Use the same categories for both sides of the comparison, such as stocks and bonds, and calculate each category as a share of the portfolio’s current total value.
Illustration, not a recommended allocation: The SEC gives an example of a portfolio intended to hold 60% stocks and 40% bonds. If stock-market gains cause stocks to represent 80% of the portfolio, the portfolio has drifted away from its 60/40 target. The example shows how relative performance can change weights; those percentages are not a recommendation for readers.
After a decline, the direction of drift depends on which parts of the portfolio fell more. A stock decline can leave stocks below target if bonds fell less, stayed steadier, or rose. Calculate the actual weights rather than assuming that every category is underweight or that a decline calls for the same trade.
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Step 3: Choose a way to move toward the target
The SEC and FINRA describe three general approaches to rebalancing in their Investor Bulletin: Year-End Investment Considerations for Individual Investors: sell some overweight assets and buy underweight assets; use available new money to buy underweight categories; or direct ongoing contributions toward categories that are below target. The best fit depends on your account, cash flows, costs, and plan.
| Method | New contributions or cash needed? | Does it require sales? | Costs and considerations |
|---|---|---|---|
| Direct new contributions to underweight categories | Yes—ongoing contributions must be available. | No, not by itself. | May reduce the need to sell, but purchases can still have transaction costs. Check whether this approach can bring the portfolio sufficiently close to target under your review rule. |
| Use available cash to buy underweight categories | Yes—cash must be available in the account. | No, not by itself. | May move weights toward target without selling. Consider applicable purchase fees and whether the amount of cash is sufficient. |
| Sell overweight assets and buy underweight categories | No new contribution is required. | Yes. | Selling can involve transaction fees and tax consequences. Check the account and applicable rules before placing trades. |
Cash flows and purchases may be worth considering before sales in taxable or fee-bearing accounts, but they will not always be enough to bring a portfolio back toward its target. The cited guidance does not establish one method as best for every investor or account. If you sell, the tax result depends on your circumstances and applicable rules; a general guide cannot calculate it.
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Step 4: Follow a review rule instead of reacting to every move
You can review on a calendar schedule or use a threshold selected in advance: review when a category’s allocation moves far enough from its target to cross that threshold. These are alternative triggers, not a universal schedule or threshold. The SEC says rebalancing tends to work best relatively infrequently and does not prescribe one rule for all investors. Choose a rule consistent with your plan, then apply it rather than making changes in response to each market move.
Step 5: Check costs and account rules before trading
Before placing an order, check whether the transaction may involve fees and whether selling could have tax consequences for your account and jurisdiction. The SEC guide and SEC/FINRA bulletin flag these considerations, but they do not determine current tax treatment across account types or jurisdictions. For help with personal tax implications, consult a qualified tax adviser; for allocation or planning questions, consider a qualified financial professional.
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When a target-date fund may be relevant
A target-date fund is one possible managed alternative: it changes its allocation over time according to the fund’s design. Its availability and suitability depend on your circumstances and the fund’s terms. Before deciding, review current fund documents for its stated goal, glide path, holdings, and fees. The general function of a target-date fund does not establish that any particular fund fits your plan.
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