If your portfolio no longer matches its target allocation, first check whether the target still fits your goal, time horizon, financial situation and comfort with risk. If it does, use a review rule you chose in advance and move the portfolio toward target only after considering cash flows, fees and possible tax consequences. There is no universally endorsed rebalancing schedule or drift threshold.
Why a portfolio drifts—and why it matters
Asset classes earn different returns over time. As a result, their shares of a portfolio change even when you make no trades. If stocks rise faster than bonds, for example, stocks can become a larger part of the portfolio than intended, changing its risk profile.
The SEC’s Investor.gov gives an illustrative example: a portfolio with a 60% stock target could reach 80% stocks after market gains. That is an example, not a forecast or a measured typical outcome. Investor.gov’s asset-allocation guide explains why portfolio weights can change as investments perform differently.
Check whether the target allocation still fits
Before rebalancing, compare your current portfolio with the target you actually want to hold. A target is not permanent if your circumstances change: a different goal, a nearer or more distant time horizon, a changed financial situation, or a different tolerance for losses may justify reviewing it.
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Do not change the target just because one asset class has recently outperformed. That can turn rebalancing into performance chasing: increasing exposure to what has risen rather than choosing a mix suited to your needs. The SEC’s guide to asset allocation and diversification discusses the relationship between allocation and an investor’s circumstances.
Measure the gap on a consistent basis
Compare current weights with your written target using the same asset-class categories and the same portfolio scope. Decide whether the target applies to an individual account or to your investments across accounts; mixing those views can make a comparison misleading. The cited guidance does not prescribe a detailed method for combining multiple accounts, so be explicit about which holdings you include.
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Review more than the headline asset-class percentages when appropriate. Investor.gov notes that holdings within an asset class may also merit review; an allocation can be on target while particular investments no longer fit the plan.
Choose a review rule before the next market move
Two common approaches are checking on a calendar schedule or checking when an allocation moves beyond a threshold you selected in advance. FINRA says there is no official timeline for rebalancing; an annual review is one possible approach, not a universal prescription. Investor.gov says rebalancing tends to work best relatively infrequently. Neither source establishes a threshold that suits every investor.
- Calendar review: Check at intervals you set, such as during an annual portfolio review. This is straightforward, but it may prompt trades even when the allocation has barely moved.
- Threshold review: Check whether an asset class has moved beyond a preselected band around its target. This can avoid unnecessary adjustments, but requires choosing a band and monitoring it. The cited guidance does not endorse one specific band for all investors.
The point of either rule is to make the decision less dependent on market predictions. Set the rule as part of the plan, rather than reacting to whichever investment has just done best or worst.
Compare ways to move back toward target
Rebalancing does not always require selling. The practical choice depends on available cash flows, account type, trading costs and possible tax effects.
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| Approach | How it works | What to consider |
|---|---|---|
| Sell overweight holdings and buy underweights | Trade holdings that exceed their target weights to add to those below target. | May involve transaction fees, sales charges, realized gains and tax consequences, depending on the account and circumstances. |
| Direct new money to underweights | Use incoming cash or other available contributions to increase holdings below target instead of selling overweight assets. | Can reduce the need to sell, but may take time to close a large gap and depends on having cash to invest. |
| Adjust ongoing contributions | Change how future contributions are allocated so they go toward underweight asset classes. | Useful when contributions are continuing; check whether the contribution options and account rules support the adjustment. |
The SEC’s rebalancing guide describes selling overweight assets, buying underweights and directing new contributions toward underweighted investments. It also notes that rebalancing can involve fees and tax consequences. FINRA likewise advises considering fees and tax implications when evaluating allocation decisions: Asset Allocation and Diversification.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Account for costs and taxes before placing trades
Before selling, check the specific account and investments involved. A sale can generate a realized gain, and transaction fees or sales charges can reduce the value of an adjustment. Tax treatment depends on the account and your circumstances, so a trade that makes sense in one account may have different consequences in another. The SEC and FINRA identify these costs as factors to weigh; neither offers a universal tax outcome for an individual portfolio.
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If the implications are unclear, consider getting advice based on your own tax and investment situation before trading. Do not assume that a portfolio must be changed immediately just because it has drifted: SEC Office of Investor Education and Assistance Director Lori Schock writes, “And with all that said, sometimes leaving your portfolio just the way it is for the time being, is in your best financial interest.” Investor.gov: Is It Time to Rebalance Your Investment Portfolio?
When a target-date fund handles allocation changes
A target-date fund’s adviser typically adjusts the fund’s allocation over time, often making it more conservative as the target date approaches. That means the fund generally manages allocation changes within the fund, rather than requiring you to trade its underlying holdings yourself. It does not decide whether the fund itself suits your goal: check its target date, investment mix and costs. See the SEC’s Target Date Funds – Investor Bulletin.
Quick Recap
A practical sequence for reviewing drift
- Write down the target and scope. Note the target weights and whether they apply to one account or your combined portfolio.
- Compare current weights with that target. Use consistent asset-class categories and account scope.
- Reassess the target if circumstances changed. Consider your goal, time horizon, finances and risk tolerance; do not use recent performance alone as the reason.
- Apply your preselected review rule. Use a calendar check or a threshold you chose in advance; no cited source identifies one schedule or band as right for everyone.
- Choose a proportionate adjustment. Consider directing new contributions to underweights before deciding whether sales are needed.
- Check costs and tax effects before trading. Review the specific account, investments, fees, sales charges and possible realized gains.
- Review the holdings within each asset class. Confirm that the investments still fit the goal and target.
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