Calendar, threshold, and hybrid rebalancing
| Rule | How it works | Tradeoff |
|---|---|---|
| Calendar | Rebalance on a fixed date (e.g. once a year) | Simple; may act when barely off, or miss a big mid-year swing |
| Threshold band | Rebalance when an asset drifts ~5% past target | Responsive; needs occasional checking |
| Hybrid (common) | Check annually, act only if past the band | Low effort and low overtrading -- best of both |
Where you rebalance changes the tax bill
WHERE you rebalance matters for taxes. Inside a 401(k) or IRA, selling to rebalance is free -- no tax. In a taxable account, selling winners triggers capital-gains tax, so rebalance there mainly by directing NEW contributions to the laggard rather than selling the winner.
Check whether your mix needs rebalancing
Check your current stock/bond split against your target. If it is more than ~5 points off, rebalance -- and in a taxable account, do it by buying the laggard with new cash rather than selling the winner.
Rebalancing makes you sell high and buy low
What rebalancing does after a strong year
Your target is 70% stocks / 30% bonds, but a strong year pushed you to 80/20. What does rebalancing do?
The psychology of selling your winners
Related reading: the psychology of rebalancing
Rebalancing is hard because selling winners feels wrong -- the disposition effect (bf-11, Disposition Effect) makes us hold winners too long and dump losers, while splitting money evenly across whatever funds are on offer is the 1/N trap (bf-12, Naive Diversification). Both live in Behavioral Finance.
Check your understanding
Sit with the ideas.
You hold a 60/40 stock/bond portfolio in a TAXABLE account, and a strong run has drifted it to 70/30. What's the most tax-efficient way to rebalance?
Why: