How it works
Rebalancing means selling winners and buying underperformers to maintain your target allocation. When stocks rally, your allocation drifts above target. Rebalancing restores the balance, forcing you to sell high and buy low. Three strategies: calendar (rebalance quarterly/annually regardless), threshold (rebalance when drift exceeds a set percentage), and hybrid (check on a schedule but only act when threshold is exceeded). Threshold-based rebalancing is tax-efficient because it only triggers when drift is significant. Calendar rebalancing is simpler but may trigger unnecessary transactions. Compound interest works in your favor when you save and against you when you borrow. At 7 percent annual return, money doubles roughly every 10 years. At 20 percent credit card APR, debt doubles every 3.5 years. This asymmetry is why paying off high-interest debt before investing is almost always the right move — you are eliminating a guaranteed negative return that exceeds any reasonable investment return. Every field in this calculator exists for a reason. Enter Target stocks (%), Target bonds (%), Current stocks (%), Rebalancing threshold (%), Capital gains tax rate (%), All inputs stay in your browser. Adjust one field at a time to see which lever moves the answer most — the formula on this page lets you verify every step against the defaults shown in the worked example.
Formula
Drift = |Current allocation − Target allocation| | Rebalance if drift > threshold
Tips
- Threshold rebalancing (5%) is more tax-efficient than calendar rebalancing.
- Rebalance in tax-advantaged accounts first to avoid capital gains tax.
- Rebalance by directing new contributions rather than selling.
- Annual rebalancing is sufficient for most investors.
Frequently asked questions
- How often should I rebalance?
- Annually is sufficient for most investors. More frequent rebalancing (quarterly) adds marginal benefit with more transaction costs. Threshold-based rebalancing (when drift exceeds 5%) is the most tax-efficient.
- Does rebalancing improve returns?
- Rebalancing primarily reduces risk, not increases returns. It forces buy-low-sell-high behavior. The main benefit is keeping your portfolio aligned with your risk tolerance.
- What does the portfolio rebalancing strategy calculate?
- It takes target stocks (%), target bonds (%), current stocks (%), rebalancing threshold (%), capital gains tax rate (%) as inputs and computes current drift from target, rebalance now?, amount to rebalance, estimated tax cost. The primary output is current drift from target. Determine when and how to rebalance your portfolio — threshold vs calendar vs hybrid strategies.