Rebalancing — Intermediate — Growth Capital Group

The Concept

Why Your Allocation Drifts Even If You Never Touch It

Say you build a 60/40 stocks/bonds portfolio. If stocks then rally hard while bonds stay flat, stocks will naturally grow to take up more than 60% of the total — not because you did anything, but simply because they grew faster. Left alone, your portfolio quietly drifts toward higher risk than you originally chose, exactly when a pullback would hurt the most.

Rebalancing means periodically trimming the positions that have grown oversized and topping up the ones that have shrunk, to bring the mix back to target. Mechanically, that means selling some of what's gone up and buying some of what's lagged — a disciplined, systematic version of "sell high, buy low" that doesn't depend on predicting anything.

There are two common approaches: calendar-based rebalancing (check and adjust on a fixed schedule, like annually) and threshold-based rebalancing (rebalance whenever an allocation drifts more than a set amount, like 5 percentage points, from target). Either works — what matters most is having a rule and actually following it, rather than rebalancing on gut feeling (which tends to mean never doing it, since it always feels wrong to sell what's been winning).

⚖️ Illustrative Example: A 60/40 Portfolio After a Stock Rally

Real portfolios don't come with round numbers, so here's a clean illustrative example to see the mechanics clearly.

Stage	Stocks Value	Bonds Value	Stocks %	Bonds %
Starting Portfolio ($100,000)	$60,000	$40,000	60%	40%
After a Strong Stock Rally	$84,000	$42,000	67%	33%
After Rebalancing Back to 60/40	$75,600	$50,400	60%	40%

After the rally, stocks quietly drifted from 60% to 67% of the portfolio — nobody chose that, it just happened. Rebalancing means selling $8,400 of stocks (locking in some of the gain) and buying $8,400 of bonds, bringing the mix back to the originally intended 60/40 split — a real, mechanical action, not a guess about where markets go next.

Watch For This

5 Things to Know About Rebalancing

Drift happens automatically — you don't need to do anything wrong for your allocation to shift; strong performers simply grow faster.
Rebalancing systematizes "sell high, buy low" — you're trimming what's grown and topping up what's lagged, without needing to predict anything.
Calendar-based and threshold-based are both valid approaches — the key is having a rule and sticking to it.
Rebalancing can have costs — trading fees and potential tax consequences (in taxable accounts) mean it shouldn't be done excessively often.
It's emotionally uncomfortable by design — selling your best performer to buy your worst one feels wrong in the moment, which is exactly why having a rule matters.

Put It Into Practice

4 Things to Check When Rebalancing

📅 Pick a Rule and Stick to It

Calendar-based (e.g. annually) or threshold-based (e.g. 5pp drift) — either works if followed consistently.

💰 Watch Trading Costs

Frequent rebalancing can rack up fees and, in taxable accounts, trigger capital gains tax.

🎯 Use New Contributions First

Directing new deposits toward underweight positions can rebalance without selling anything at all.

🧠 Expect the Discomfort

If rebalancing doesn't feel a little uncomfortable, you're probably not actually doing it.

Worth knowing: rebalancing is a risk-management discipline, not a way to boost returns on its own — its main job is keeping your portfolio's risk level where you actually intended it, not chasing extra performance.

Activity

Try It Yourself: Rebalancing Calculator

Enter your current stocks/bonds values and target allocation — see exactly how much to buy and sell to get back on target.

Current Stocks Value ($)

Current Bonds Value ($)

Target Stocks (%)

Target Bonds (%)

Current Stocks Weight

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Drift From Target

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Model: current weight = stocks value ÷ total portfolio value. To rebalance, move (current weight − target weight) × total portfolio value from the overweight asset to the underweight one.

End of Lesson