Rebalancing a portfolio
Bring the proportions back into view.
Price changes can shift a portfolio away from its intended mix. Rebalancing restores proportions; it does not erase losses or identify tomorrow’s winners.
Watch the weights, not just the balances
Different returns change an allocation. Suppose a $1,000 example starts with $600 in stocks and $400 in bonds. If stocks rise 25% and bonds stay flat, it becomes $750 plus $400. Stocks now represent about 65.2% of $1,150. The 60/40 starting mix is an arithmetic example, not a recommended portfolio.
Restore the mix without inventing a gain
Returning this example to 60/40 would mean $690 in stocks and $460 in bonds. Moving $60 between them changes the weights while the $1,150 total stays unchanged before costs. New contributions to an underweight asset can also move a portfolio toward its target, with a different total and potentially less selling.
Make the process explicit
A rule can use a review schedule or a threshold for allocation drift. Trading costs and possible tax consequences matter. Rebalancing controls the mix of risks; it cannot guarantee a better return. If goals or cash needs change, the target itself may need reconsideration. This exercise holds bond prices flat only to isolate one effect.
See how an allocation drifts
A hypothetical $1,000 starts with $600 in stocks and $400 in bonds. Change the stock return while bonds stay flat. This mix is an example, not a recommendation.
| Holding | After price change | Restored 60/40 |
|---|---|---|
| Stocks | $750.0065.2% | $690.0060.0% |
| Bonds | $400.0034.8% | $460.0040.0% |
| Total | $1,150.00 | $1,150.00 |
Restoring this example’s mix moves $60.00 from stocks to bonds. The total stays $1,150.00 before costs.
Trading costs, taxes, new contributions and bond price changes are excluded. The exercise does not choose an allocation for you.In this example, moving $60 from stocks to bonds does what?
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