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Investing Basics

How to rebalance your portfolio automatically

Learn rules-based rebalancing using drift bands, recurring buys, or all-in-one ETFs/robo-advisors.

What is rebalancing?

Rebalancing means returning your portfolio to your target allocation. If you want 60% stocks/40% bonds but growth pushes it to 70%/30%, you sell stocks and buy bonds to get back to 60%/40%.

Example: Portfolio Drift

Target Allocation

60%

Stocks

40%

Bonds

After Market Growth

75%

Stocks

25%

Bonds

After Rebalancing

60%

Stocks

40%

Bonds

Automatic rebalancing options

1. One-Ticket ETFs

Auto-rebalancing happens inside the fund

Examples:

  • • VTHRX (Target Date)
  • • VEQT (All-equity)
  • • VBAL (Balanced)

2. Robo-Advisors

Set target mix; rebalances automatically

Examples:

  • • Wealthfront, Betterment
  • • Vanguard Personal Advisor
  • • Schwab Intelligent Portfolios

3. DIY Rules

Manual rules-based approach

Methods:

  • • ±5% drift bands
  • • Annual calendar date
  • • New contributions first

DIY rebalancing strategies

Strategy 1: Drift Bands (±5%)

  • Target: 60% stocks, 40% bonds
  • Rebalance when: Stocks hit 65%+ or 55%-
  • Action: Sell overweight, buy underweight
  • Frequency: Check monthly, rebalance as needed

    • Strategy 2: Calendar Rebalancing

  • Schedule: Same date annually (Jan 1, birthday)
  • Action: Rebalance regardless of current allocation
  • Pros: Simple, consistent
  • Cons: May rebalance unnecessarily

    • Strategy 3: New Money First

  • Method: Direct new contributions to underweight assets
  • Example: If stocks are overweight, buy only bonds with new money
  • Benefit: No selling required, tax-efficient
  • Best for: Regular contributors with taxable accounts

    • Tax-smart rebalancing tips

    Minimize Tax Impact

    1. Use new contributions first – Avoid selling appreciated assets
    2. Prioritize tax-advantaged accounts – IRA/401k for sells, taxable for buys
    3. Harvest losses – Sell losers in taxable accounts to offset gains
    4. Consider asset location – Hold tax-inefficient funds in tax-advantaged accounts
    5. Time your rebalancing – Wait for long-term capital gains rates (1+ year)

    Rebalancing frequency comparison

    FrequencyProsConsBest For
    MonthlyQuick correctionsOvertrading, taxesTax-advantaged only
    QuarterlyRegular maintenanceStill frequentActive managers
    AnnuallySimple, tax-friendlyMay miss big driftsMost investors
    ThresholdOnly when neededRequires monitoringExperienced investors

    Setting up automatic rebalancing

    Implementation Steps

    1. Choose your method:
      • • Easy: Target-date fund or robo-advisor
      • • DIY: Set calendar reminders + rules
    2. Set up monitoring:
      • • Track allocations in spreadsheet or app
      • • Set alerts for 5%+ drift
    3. Create action plan:
      • • Priority 1: Use new contributions
      • • Priority 2: Rebalance in tax-advantaged accounts
      • • Priority 3: Tax-loss harvest in taxable accounts

    Frequently Asked Questions

    How often should I rebalance?

    Annually or at drift thresholds—consistency matters more than frequency. Avoid over-rebalancing which increases taxes and fees.

    Will rebalancing hurt my returns?

    It can slightly in raging bull markets, but it reduces risk and prevents major drawdowns. The behavioral benefit often outweighs small return costs.

    Should I rebalance during market crashes?

    Yes—this forces you to "buy low, sell high." Crashes are when rebalancing provides the most value.

    What if I can't afford to rebalance?

    Use new contributions to buy underweight assets. Consider switching to target-date funds or adding more bonds to reduce volatility.