Rebalancing — Selling Winners on Purpose

The mechanism

Rebalancing restores target weights: if stocks grew from 60% to 75% of the portfolio, sell stocks, buy bonds, back to 60%. It feels exactly wrong — you are selling what rose to buy what fell — and that is the point: it is a SYSTEMATIC contrarian trade that enforces "sell high, buy low" without requiring a view. It also continuously de-risked portfolios that drifted riskier than designed.

When to rebalance

Two methods: calendar (annually/semi-annually — simple, low-cost) and bands (act only when an asset drifts ±5 percentage points from target — fewer trades, tighter risk). Best practice combines them: check on a schedule, act only on bands. Over-frequent rebalancing just generates taxes and costs while clipping the winners you want to run.

The costs

Rebalancing has real friction: capital-gains taxes in taxable accounts (rebalance inside tax-advantaged accounts first; use new contributions and dividends to rebalance tax-free), transaction costs, and the behavioral pain of trimming winners. The design goal: maximum risk-control per unit of tax and friction.

Sources

• Portfolio RebalancingInvestopedia
• The Little Book of Common Sense InvestingJohn Bogle