Even a carefully built portfolio drifts. As some holdings outperform and others lag, the weights wander from your target allocation, and your risk exposure wanders with them. Rebalancing is the discipline of periodically buying and selling to restore the intended mix — trimming what has run up, topping up what has lagged.
The mechanics are simple. A 60/40 stock/bond portfolio, after a strong run in equities, might drift to 75/25; the equity risk you now carry is no longer the risk you chose. Rebalancing sells the overweight stocks and buys the underweight bonds to restore 60/40. It works best between assets that move differently but converge over the long run — growth versus value, U.S. versus international — and it works against you only if you believe one side will outperform forever.
How often? Less often than instinct says. Dichtl et al.80 found that once equities exceed roughly 30% of the portfolio, having a rebalancing rule materially improves risk-adjusted performance — but the precise frequency barely matters, and Vanguard’s research points to annual rebalancing as the sweet spot among simple schedules. One subtlety is timing luck: a portfolio rebalanced every January is hostage to January’s particular prices. Corey Hoffstein’s fix81 is tranching — split the capital into several sleeves rebalanced on staggered dates, so no single date dominates the result.