5 portfolio rebalancing rules smart investors follow

Investors should review their portfolio at least once a year or after major market movements. Over time, market gains or losses can change the weight of assets and move the portfolio away from its intended allocation.

Different asset classes deliver different returns, which can distort the original mix. For example, if equities rally strongly, their share in the portfolio may rise above the planned level, increasing overall risk. Rebalancing restores the intended allocation.

Rebalancing often involves trimming assets that have risen sharply and increasing exposure to those that have lagged. This disciplined approach helps investors book profits and redeploy money into relatively undervalued assets.

Instead of selling existing investments, investors can rebalance by directing new money toward underweighted assets. This approach can help reduce transaction costs and potential tax implications.

Portfolio allocation should evolve as financial goals or timelines change. For instance, investors nearing retirement or a major goal may need to reduce risk and adjust their asset mix accordingly.