Rebalancing
Rebalancing means periodically selling what's grown and buying what's lagged to return your portfolio to its target asset allocation. It enforces 'buy low, sell high' automatically and keeps your risk from drifting higher than you intended as stocks outrun bonds.
Two triggers are common: a fixed calendar, usually annual, or a drift threshold — a widely used version rebalances when an allocation moves more than five percentage points, or a quarter of its target weight, whichever is smaller. Both work; rebalancing more often adds cost without adding much. The discipline is uncomfortable by design, because it means selling what has performed well to buy what has not. Order matters for tax: inside an IRA or 401(k) rebalancing is free of tax consequences, while in a taxable account selling realises gains. There, directing new contributions and dividends toward the lagging asset restores the balance without a sale.
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