Rebalancing: Back to Your Mix

The story: Nora’s mix drifts

Nora sees that a strong year for stocks tipped the mix too far toward stocks, then moves it back to the plan.

1. Narrator: Nora’s plan is 70% stocks, 25% bonds and 5% cash. Then stocks had a great year.
2. Nora: Now stocks are 80% of everything. That’s good news, right?
3. Narrator: It’s good growth, but the mix has drifted. More stocks means a bigger fall in the next drop than Nora signed up for.
4. Narrator: Rebalancing puts the mix back: trim stocks, and add to bonds and cash.
5. Nora: So I sell a little of what went up and buy what lagged. That’s buy low, sell high, on autopilot.
6. Narrator: Nora picks one date a year to check, and rebalances inside retirement accounts, where trades aren’t taxed.
7. Narrator: Once a year, put your mix back.

What you’ll learn

1. Drift happens on its own

   When one part of your mix grows faster than the rest, it takes up more of the total. That’s drift. After a strong year for stocks, a mix can end up holding more risk than you chose.

2. When to rebalance

   Some people rebalance on a schedule, such as once a year. Others use a threshold: they rebalance when any part is off by a set amount, like 5 percentage points. Some use both. Either way, there’s a rule, so feelings don’t decide.

3. Use new money first

   The gentlest way to rebalance is to send new contributions to whatever is behind. When that isn’t enough, trim what grew and add to what lagged. That builds “buy low, sell high” into the plan.

4. Mind the taxes

   Trades inside retirement accounts like a 401(k) or an IRA aren’t taxed. In a regular investment account, selling at a gain can mean a tax bill, which is called tax drag. Many people rebalance inside retirement accounts first.

Key words

drift

when your mix slides away from its target as markets move

rebalancing

moving your mix back to its target

threshold

a set amount of drift that tells you it’s time to rebalance

tax drag

growth lost to taxes when you sell in a regular account

Common questions

Do target-date funds rebalance for me?

Yes. A target-date fund rebalances inside itself. If it’s all you hold, there’s little to do beyond a yearly look.

Is rebalancing more often better?

Not usually. Once a year or a threshold rule is enough for most people, and it keeps trading and taxes low.

Remember this

Once a year, put your mix back.

Try it: Pick your rebalance rule

1. Write down your target mix.
2. Pick a rule: a yearly date, a threshold or both.
3. Add your rebalance date to your yearly check-up list.

No account needed: a sheet of paper and a date on your calendar.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• What rebalancing means

  Source: Investor.gov (SEC)(opens in a new tab)