How to rebalance your portfolio without selling

When one part of a portfolio grows faster than the rest, the weights drift from what you planned. One way back is to sell what went past its target and buy what fell behind. Another is to sell nothing and point new money at whatever is furthest from its target.

This article shows what research says about rebalancing and explains the second way. It doesn't say what to buy: the targets and the assets are your choices.

Why rebalance

Without rebalancing, a portfolio's risk changes on its own. The part that grows the most is usually the riskier one, and it keeps taking up more room. In a Vanguard study of US data from 1926 to 2009, a portfolio that started with 60% stocks and 40% bonds and was never rebalanced held more than 84% stocks on average over the period. Its standard deviation was 14.4% a year, against 12.1% for the same portfolio rebalanced every month (Jaconetti, Kinniry and Zilbering, 2011).

The never-rebalanced portfolio also returned more, 9.1% a year against 8.5%, because it held more stocks and took more risk. That's why the goal of rebalancing is to keep the risk you chose, not to earn more. Vanguard itself says the purpose of rebalancing is to manage risk, not maximize returns (Vanguard).

Theory also shows when it helps and when it hurts. Keeping fixed weights works best in markets that go up and down without a clear trend, and worse in long trends, because it sells what keeps rising and buys what keeps falling (Perold and Sharpe, 1988). The data show both sides:

• In the 2007 to 2009 crisis, rebalancing a 60% stock and 40% bond portfolio every month made its largest drop 5 percentage points worse than leaving it alone (Man Institute, 2020).
• In the February and March 2020 fall, it was the other way around. The portfolio never rebalanced since 1994 had drifted to nearly 80% stocks and fell 27.8%, while the rebalanced versions fell between 20.67% and 21.34% (Arnott, 2020).

Some studies describe an extra return from keeping weights fixed (Booth and Fama, 1992; Willenbrock, 2011). A review shows this gain is often overstated, because it gets mixed up with the gain from diversification, which exists even without rebalancing (Cuthbertson and others, 2016).

Why rebalance as you invest

Selling has costs: commissions, spreads and, when there's a profit, taxes. In the US, selling stocks for more than you paid is a capital gain, and net capital gains are taxed (IRS). In the UK, you may have to pay Capital Gains Tax when you sell shares at a profit (GOV.UK).

The same Vanguard study tested rebalancing without selling anything, just by sending dividends and interest to the part below its target. According to the authors, that delivered most of the risk control of the strategies that sell, at a much lower cost. Since high dividends and interest may not come back, they point to new investments and withdrawals as a way to rebalance that doesn't depend on them (Jaconetti, Kinniry and Zilbering, 2011).

Morningstar, which measures the gap between what funds return and what their investors actually earn, also suggests, in certain cases, automating routine tasks like rebalancing to narrow that gap (Ptak, 2026).

The math in three steps

1. Add the amount you're investing to your current portfolio value.
2. Multiply that total by each part's target weight. That's what the part should hold.
3. Subtract what it holds today. The result is its gap to target.

A part with a positive gap gets what you invest. A part with a negative gap is already past its target and waits for the portfolio to grow.

An example

A $10,000 portfolio has two parts, A and B, with $5,000 each. The targets are 60% and 40%, and this month you invest $1,000. The total becomes $11,000.

Only part A has a positive gap, so everything you invest goes to it. Nobody sold anything, and the portfolio got closer to the plan.

Part A50.0% to 54.5%, target 60%

Part B50.0% to 45.5%, target 40%

what you already havethis investmenttarget

How long it takes

With prices standing still, this portfolio reaches its targets on the third $1,000 investment. The smaller each investment is compared with the portfolio, the more months it takes. That's the trade-off of not selling.

In practice, prices move every month, and many brokers only sell whole shares. That's why the math is redone every time you invest, and why a small leftover usually remains.

How often

For those who rebalance by selling, studies show that frequency barely changes the outcome, and that costs matter more. In the Vanguard study, rebalancing every month, at any drift, took 1,008 rebalancing events over 84 years. Checking once a year and acting only on a 10 percentage point drift took 15, with similar risk and return. The authors concluded that, for broadly diversified stock and bond fund portfolios, checking the portfolio once or twice a year and rebalancing when a weight drifts 5 percentage points from its target is likely to strike a reasonable balance between risk and cost. More concentrated portfolios may need more frequent rebalancing (Jaconetti, Kinniry and Zilbering, 2011).

Other studies reach different rules. One found larger gains with bands of 20% of each target weight, which for a 40% target run from 32% to 48%, checked every few trading days, but in the 1994 to 1998 bull market no rule beat doing nothing (Daryanani, 2008).

When you invest every month, the math is redone at no extra cost, because the new money has to be invested anyway.

Sources

When a journal article is paywalled, the link goes to a free version from the authors when there is one, or to the page with the abstract.

• Arnott, A. (2020). Why rebalancing (almost always) pays off. Morningstar.
• Booth, D. G. and Fama, E. F. (1992). Diversification returns and asset contributions. Financial Analysts Journal, 48(3). DOI: 10.2469/faj.v48.n3.26.
• Cuthbertson, K., Hayley, S., Motson, N. and Nitzsche, D. (2016). What does rebalancing really achieve? International Journal of Finance & Economics, 21(3), 224–240. DOI: 10.1002/ijfe.1545.
• Daryanani, G. (2008). Opportunistic rebalancing: a new paradigm for wealth managers. Journal of Financial Planning, January 2008.
• GOV.UK. Tax when you sell shares.
• IRS. Topic no. 409, Capital gains and losses.
• Jaconetti, C. M., Kinniry, F. M. and Zilbering, Y. (2011). Best practices for portfolio rebalancing. AAII Journal, May 2011. Adapted from the authors' 2010 Vanguard study.
• Man Institute (2020). Strategic rebalancing. Summarizes Granger, N., Greenig, D., Harvey, C. R., Rattray, S. and Zou, D. (2014), Rebalancing risk.
• Perold, A. F. and Sharpe, W. F. (1988). Dynamic strategies for asset allocation. Financial Analysts Journal, 44(1). DOI: 10.2469/faj.v44.n1.16.
• Ptak, J. (2026). Mind the Gap 2026. Morningstar.
• Vanguard. Rebalancing your portfolio.
• Willenbrock, S. (2011). Diversification return, portfolio rebalancing, and the commodity return puzzle. Financial Analysts Journal, 67(4), 42–49. DOI: 10.2469/faj.v67.n4.1.