Rebalancing
Rebalancing means resetting a portfolio back to its target weights after market moves have pushed them off course, selling what has grown overweight and buying what has shrunk. It converts a vague intention about risk into a maintained reality, because untended portfolios drift toward whatever went up last.
The math
A hypothetical $200,000 portfolio starts at 60/40: $120,000 in stocks, $80,000 in bonds. Stocks double over a strong run while bonds sit still.
The portfolio is now $320,000, but equities make up $240,000 of it, 75 percent. The investor who chose 60 percent equity risk is silently carrying 75.
| After the rally | Rebalanced | |
|---|---|---|
| Stocks | $240,000 | $192,000 |
| Bonds | $80,000 | $128,000 |
| Equity weight | 75% | 60% |
Restoring the target means holding $192,000 in stocks, a $48,000 sale. Skip it, and the next 40 percent equity decline costs $96,000 instead of the $76,800 the chosen allocation implied: roughly $19,000 of unplanned damage.
The trap
Mechanical rebalancing applied one level too deep. Resetting asset-class weights is risk control; force-trimming every winning stock back to its original weight is something else, a tax on compounding.
An investor who automatically cuts each position that doubles will spend a career amputating exactly the businesses that were proving the thesis right, paying capital gains taxes for the privilege.
The move
Rebalance risk, tolerate conviction. Reset the stock/bond/cash split on a calendar or when drift passes a band, say five percentage points.
Inside the equity sleeve, let winners run while they remain reasonably valued, and trim only when one position grows large enough to threaten survival if the thesis fails. Route new savings toward the underweight side first: rebalancing with fresh cash accomplishes the same reset without triggering taxes, which matters more the longer the holding period runs.