How to Rebalance Your Portfolio: A Complete Guide for 2025

Keep your investments on track by learning the best strategies for rebalancing your portfolio, minimising risks, and maximising returns as the year comes to a close.

If you’ve ever wondered how to rebalance your portfolio but felt overwhelmed by the jargon, you’re not alone. Portfolio rebalancing might sound like something only financial experts do, but it’s actually a smart, straightforward way to keep your investments on track—no matter your level of expertise.

Think of it as giving your portfolio a little tune-up. Over time, some investments grow faster than others, throwing your carefully planned asset mix out of balance. Rebalancing helps you realign your portfolio with your original goals, ensuring that your risk stays in check and your money keeps working efficiently for you.

As 2024 comes to a close, now is the perfect time to revisit your investments and make any necessary adjustments. In this guide, we’ll break down everything you need to know about how to rebalance your portfolio, from the basics of what it means to strategies you can use, and even how to do it without triggering hefty taxes. By the end, you’ll have a clear plan to enter 2025 with confidence, and a portfolio that’s ready to perform.

Let’s get started!

2. Basics of Portfolio Rebalancing

What is Rebalancing?

Rebalancing is the process of adjusting your investment portfolio to realign it with your original asset allocation strategy. Over time, different investments grow at varying rates, causing your portfolio to drift from its target allocation. For example, if stocks outperform bonds in a 60/40 portfolio, you might end up with 70% stocks and 30% bonds putting you at greater risk than you intended.

The purpose of rebalancing is simple: to maintain the balance between risk and reward that matches your financial goals and risk tolerance. By periodically resetting your allocations, you ensure that your investments continue to work effectively toward your long-term objectives.

For more detailed insights, Investopedia has an excellent guide on portfolio rebalancing and its importance.

Is Rebalancing a Good Idea?

Yes, rebalancing is not just a good idea, it’s essential. It offers several key benefits:

1. Risk Management: It prevents overexposure to a single asset class by keeping your portfolio diversified.
2. Discipline: Rebalancing forces you to sell high-performing assets and buy underperforming ones, which aligns with the “buy low, sell high” principle.
3. Goal Alignment: It ensures your investments stay in line with your changing financial goals and time horizon.

Without regular rebalancing, you risk allowing your portfolio to take on more risk than you’re comfortable with. Morningstar has an informative article on why rebalancing matters.

What is the Best Frequency to Rebalance a Portfolio?

There’s no one-size-fits-all answer, but the most common approaches include:

• Calendar-Based Rebalancing: Adjusting your portfolio at set intervals (e.g., annually, semi-annually). This method is simple and works well for most investors.
• Threshold-Based Rebalancing: Rebalancing only when your portfolio’s allocation deviates beyond a certain percentage (e.g., 5% or 10%). This approach is more precise but requires regular monitoring.
• Event-Based Rebalancing: Making adjustments after major life events or market shifts, such as a recession or retirement.

Each strategy has its pros and cons, and the right choice depends on your time, resources, and investment style. Fidelity’s portfolio management tips are a great resource for exploring these approaches further.

3. Rebalancing Methods and Strategies

How Do You Easily Rebalance a Portfolio?

Here’s a simple step-by-step guide:

1. Review Your Current Allocation: Compare your current portfolio against your target allocation.
2. Identify Deviations: Spot any over- or underweight assets.
3. Decide on Adjustments: Either sell high-performing assets or add to underperforming ones.
4. Use Automation: Many brokers and robo-advisors offer automatic rebalancing tools to make the process seamless.

Platforms like Betterment and Wealthfront provide automated solutions for rebalancing, which are particularly useful for hands-off investors. Check out NerdWallet’s comparison of the best robo-advisors to find one that suits your needs.

What Are Rebalancing Strategies?

Rebalancing strategies generally fall into two categories:

• Passive Rebalancing: A hands-off approach that uses automation or scheduled adjustments (e.g., annually).
• Active Rebalancing: A more involved approach that requires frequent monitoring and manual adjustments based on market conditions.

The choice between these depends on your level of engagement and the complexity of your portfolio. Vanguard offers a helpful overview of rebalancing strategies for various investment styles.

Can You Rebalance a Portfolio Without Selling?

Yes, and it’s a great way to avoid triggering capital gains taxes. Here’s how:

1. Use New Contributions: Direct fresh funds into underweight asset classes.
2. Redirect Dividends: Allocate dividends and interest payments toward underperforming assets.
3. Tax-Advantaged Accounts: Rebalance within tax-advantaged accounts like IRAs, where you won’t incur taxes on sales.

This tax-efficient strategy is especially valuable for investors looking to minimize costs. Schwab offers more insights on tax-efficient investing.

4. Key Rules and Concepts

The 5/25 Rule

The 5/25 rule is a simple guideline for deciding when to rebalance your portfolio. It works like this:

For example, if your portfolio allocates 10% to a small-cap stock fund, you’d only rebalance if it falls below 7.5% or rises above 12.5%. This approach ensures you’re not rebalancing too often but are still maintaining alignment with your goals. The Motley Fool has a great breakdown of how this rule works in practice.

The 50/30/20 Rule

The 50/30/20 rule isn’t just about budgeting—it can guide your overall financial strategy, including investments. Here’s how:

By ensuring a steady stream of funds for investments, this rule helps you maintain a consistent contribution toward your portfolio, making rebalancing easier over time. Learn more about the 50/30/20 rule here.

The 10/5/3 Rule

The 10/5/3 rule sets realistic expectations for investment returns:

When rebalancing, these benchmarks help you evaluate whether your portfolio’s performance is in line with historical trends. This can guide decisions on whether to stick to your allocations or adjust based on changing market conditions.

The 25/25/25/25 Investment Strategy

This strategy involves allocating your portfolio equally across four asset classes: stocks, bonds, real estate, and cash. It’s designed for maximum diversification and reduced risk. While it’s not for everyone, it can serve as a starting point for investors who want balanced exposure across different markets. Check out this resource from Kiplinger for more on diversified investment strategies.

5. Adapting to Life Stages

How to Rebalance a Portfolio as You Age

As you grow older, your financial priorities shift, and so should your portfolio. Younger investors often prioritize growth, while retirees typically focus on income and capital preservation. A common rule of thumb is the “100 minus age” rule, which suggests allocating your age in bonds and the rest in stocks. For example:

This gradual shift reduces risk as you approach retirement. Vanguard offers excellent resources on age-based portfolio rebalancing.

What Should a Balanced Portfolio Look Like by Age?

A balanced portfolio depends on your risk tolerance and financial goals, but here’s a general guideline:

Morningstar offers detailed advice on portfolio balancing by age.

What Percentage of a Portfolio Should Be Cash?

Cash plays a critical role in providing liquidity and stability during market downturns. While the ideal allocation depends on your circumstances, financial experts often recommend:
• 5-10% cash for long-term investors.
• 10-20% cash for retirees or during uncertain markets.

Keeping too much cash can hinder growth, but having enough ensures you’re prepared for emergencies or opportunities to buy undervalued assets. Fidelity’s insights on cash in a portfolio offer practical advice.

6. Timing and Market Considerations

What is the Best Month to Rebalance a Portfolio?

December is widely regarded as the best month to rebalance your portfolio. Here’s why:

For more information on end-of-year portfolio strategies, check out this comprehensive guide from Morningstar.

Should You Rebalance During a Market Downturn?

Rebalancing during a market downturn can feel counterintuitive, but it’s often a wise move. Why?

However, it’s important to rebalance thoughtfully. Selling assets in a downturn may trigger losses, so consider using dividends or new contributions instead. Vanguard offers a detailed perspective on how to approach rebalancing during market dips.

How to Rebalance a Portfolio During a Recession

During a recession, the focus shifts to preserving capital and reducing risk. Here’s how to adjust:

Fidelity’s article on investing during a recession offers practical strategies for navigating tough economic times.

7. Practical Implications

Does Rebalancing Trigger Capital Gains?

Yes, rebalancing in taxable accounts can trigger capital gains taxes if you sell assets that have increased in value. Here’s how to manage it:

The IRS explains capital gains taxation in detail in their official guide to capital gains and losses.

8. Characteristics of a Balanced Portfolio

What Should a Balanced Portfolio Look Like?

A balanced portfolio varies based on your risk tolerance and goals, but it generally includes:

• Stocks for Growth: Typically 40-70% for long-term appreciation.
• Bonds for Stability: 20-50% for steady income and reduced volatility.
• Cash for Liquidity: 5-10% to cover emergencies or take advantage of market dips.

The key is diversification spreading your investments across different asset classes and geographies to minimize risk. For examples of balanced portfolio models, take a look at this guide on asset allocation by Schwab.

Why Rebalancing Matters

Rebalancing isn’t just about fine-tuning your portfolio; it’s about sticking to your long-term financial plan. Without it, your portfolio can drift into higher-risk territory, or you might miss opportunities to reinvest in undervalued assets. Regular rebalancing also reinforces discipline, helping you avoid emotional decisions that can derail your progress.

For an in-depth look at the benefits of rebalancing, refer to this article from The Balance.

9. Conclusion

Rebalancing your portfolio may sound complex, but it’s really about ensuring your investments reflect your goals, risk tolerance, and the current market environment. As 2024 comes to a close, take the time to review your portfolio, make adjustments where needed, and start the new year on solid financial footing.

Whether you’re rebalancing based on the 5/25 rule, reallocating without selling to minimize taxes, or adapting to life stages, these strategies will help you maintain control and confidence in your financial plan.

Remember, tools like robo-advisors, brokerage platforms, and professional guidance can simplify the process. With these steps, you’ll ensure your portfolio is not just balanced, but positioned to thrive in 2025 and beyond.

For those who demand the highest standards in wealth management, we offer bespoke financial solutions tailored to the unique needs of affluent individuals and families.

With a minimum investment amount of SGD 250,000, you will gain access to privileged opportunities typically reserved for elite investors, including capital preservation strategies, private equity, and premium dividend funds.

If you are ready to take the next step in preserving and growing your wealth, I invite you to explore how our exclusive, curated strategies can help you achieve your financial aspirations.

Join other affluent clients who trust us to manage their wealth with precision and expertise.

Benjamin is dedicated to helping affluent individuals and families not just protect their wealth but enhance it through access to exclusive investments like premium dividend funds, specialised bonds, and private equity. With certifications as both a Certified Financial Planner and a Certified Private Banker, he leverages his expertise to create strategies that go beyond traditional investing—crafting portfolios that align with clients’ personal goals and future legacies.

For Benjamin, wealth management is about more than numbers. It’s about understanding the specific needs of high-net-worth clients and building financial confidence across generations. His approach centres on preserving wealth while identifying opportunities for growth, even in a shifting market, so clients can enjoy today while securing tomorrow.

Benjamin’s clients appreciate his proactive, personalised approach, knowing they have a trusted partner deeply invested in their success. If you’re looking for an advisor who offers insight, exclusivity, and a clear path to financial security, consider working with Benjamin to navigate your wealth journey confidently.

The Passive Income Guy. All Rights Reserved.

Empowering affluent families to preserve and grow their wealth for generations.

Disclaimer for representative affiliated to Manulife Financial Advisers Pte. Ltd.
Please note that the ownership of this Website belongs to a Representative of Manulife Financial Advisers Pte. Ltd. (Manulife FA). He/she is wholly responsible for the content contained in this Website. All opinions, assertions and references expressed are made in his/her personal capacity and does not represent the views of Manulife FA. The information presented is for your information only and does not consider the specific investment objectives, financial situation or needs of any person. Manulife FA disclaims any liability that may arise from the content.

Disclaimer:

This information is intended for educational purposes and should not be construed as financial advice. Please consult with a professional advisor before making any investment decisions.

Note: The investment described aims to protect your principal from market losses due to its structure. However, ongoing charges and fees may affect the overall performance, and there is a possibility that the investment value could decrease. It’s important to understand all terms and conditions before proceeding.