Portfolio Rebalancing: Adjusting Investment Portfolios to Align with Market Changes

By George Bouton on June 30, 2025

In today’s dynamic financial landscape, maintaining a well-balanced investment portfolio is more important than ever. Market fluctuations, economic shifts, and changes in personal financial goals can all impact the performance and risk profile of your investments. That’s where portfolio rebalancing comes in—a strategic process designed to realign your asset allocation with your long-term financial objectives.

What Is Portfolio Rebalancing?

Portfolio rebalancing is the process of realigning the weightings of assets in your investment portfolio. Over time, due to market performance, certain assets may grow faster than others, causing your portfolio to drift from its original allocation. For example, if equities perform exceptionally well, they may represent a larger portion of your portfolio than intended, increasing your exposure to market volatility.

Rebalancing involves selling some assets that have exceeded their target allocation and buying others that have underperformed, bringing your portfolio back in line with your desired risk tolerance and investment goals.

Why Rebalancing Matters

1. Risk Management: One of the primary reasons to rebalance is to manage risk. A portfolio that becomes too heavily weighted in one asset class—such as stocks—can expose you to greater losses during market downturns.
2. Discipline and Consistency: Rebalancing enforces a disciplined investment strategy. It encourages buying low and selling high, which can help improve long-term returns.
3. Goal Alignment: As your financial goals evolve—whether it’s saving for retirement, funding education, or purchasing a home—your portfolio should reflect those changes. Rebalancing helps ensure your investments remain aligned with your objectives.
4. Market Adaptation: Economic conditions and market trends are constantly changing. Rebalancing allows you to adapt to these shifts without making emotional or impulsive investment decisions.

How Often Should You Rebalance?

There’s no one-size-fits-all answer, but most financial professionals recommend reviewing your portfolio at least annually. Some investors prefer a calendar-based approach (e.g., quarterly or yearly), while others use a threshold-based approach, rebalancing when an asset class deviates by a certain percentage from its target allocation.

The right frequency depends on your investment strategy, risk tolerance, and market conditions. Too frequent rebalancing can lead to unnecessary transaction costs and tax implications, while infrequent rebalancing may allow your portfolio to drift too far from your goals.

Tax Considerations

Rebalancing can trigger capital gains taxes, especially in taxable accounts. That’s why it’s important to consider tax-efficient strategies, such as:

• Rebalancing within tax-advantaged accounts (like IRAs or 401(k)s)
• Using new contributions or dividends to buy underweighted assets
• Harvesting tax losses to offset gains

Working with a financial advisor can help you navigate these complexities and make tax-smart decisions.

Final Thoughts

Portfolio rebalancing is not about chasing returns or reacting to short-term market movements. It’s a proactive, strategic approach to maintaining a healthy investment mix that supports your long-term financial well-being.

As your Wealth Advisor, we are here to help you evaluate your current portfolio, assess your risk tolerance, and implement a rebalancing strategy that fits your needs. If you haven’t reviewed your portfolio recently, now is a great time to schedule a check-in.

Let’s help ensure your investments are working as hard as you are—aligned with your goals, balanced for risk, and positioned for the future.