How to Rebalance Your Portfolio Before 2026

Key Takeaways

• The main benefit of rebalancing is in the realm of risk reduction.
• Consider rebalancing when the variance from your targets has shifted 5 or 10 percentage points relative to those targets.
• Someone’s age and proximity to when they need the money should be a big determinant in how they approach rebalancing.
• Maintaining a high equity allocation makes a lot of sense for people under 50 who are still saving for retirement.
• For people over age 50, the key asset to consider adding more of is high-quality fixed income.
• Concentrate rebalancing efforts in your tax-sheltered accounts where you can sell appreciated securities, swap into something else, and not owe any taxes to do so (as long as all the money stays within that IRA or company retirement plan).

Margaret Giles: Hi, I’m Margaret Giles from Morningstar. As the year winds down, investors often review and rebalance their portfolios. Joining me to discuss what you should keep in mind if rebalancing is on your year-end to-do list is Christine Benz. She’s Morningstar’s director of personal finance and retirement planning and co-host of The Long View podcast. Christine, thanks for being here.

Christine Benz: Margaret, it’s always great to see you.

The Case for Rebalancing

Giles: So let’s start with a general question. What’s the case for rebalancing?

Benz: The main benefit of rebalancing is in the realm of risk reduction because you are having a system in place where you are periodically stripping back asset classes that have performed really well for you and are often more highly valued, and you’re adding to ones that haven’t performed as well and often have more attractive valuations. Researchers have looked at whether there might be other benefits in terms of return enhancement, but it does seem that risk reduction is really the main reason to consider rebalancing.

When Should Investors Rebalance?

Giles: So how should investors decide if they need to rebalance?

Benz: Well, ideally, you would be operating with some sort of an asset-allocation framework, and you would also, at the time you set up that asset-allocation framework, so maybe it is 60% stocks, 30% bonds, 10% cash, you also put in place how much variance from those targets you’re willing to settle for. So, if I have a 60% equity allocation, and I’m up at 67%, well, I’m over 5 percentage points higher than my set allocation, so it might be time to rebalance. So I think often thresholds of 5 percentage points or 10 percentage points relative to those targets is kind of a good way to go about it.

Giles: I like the idea of having the buffer.

Benz: Yes.

Why Rebalancing Is More Important as We Get Older

Giles: So you think that someone’s age and proximity to when they need that money should be a big determinant in how they approach rebalancing. Can you explain that a little bit?

Benz: Yeah, because I mentioned, Margaret, that risk reduction is the main benefit of rebalancing, and so a key question here is, How much do I need risk reduction? If I am someone who is in my 20s or in my 30s, well, I probably don’t need a lot of risk reduction, right? But if I’m someone who is over 50 and getting close to retirement or maybe really close to retirement and kind of counting the days, well, there I do need much more, a much higher component of lower-risk assets in my portfolio. So rebalancing is super important the later we get in life.

Why Investors Under 50 Should Maintain a High Equity Allocation

Giles: So let’s look at those different age groups. Let’s start with people under 50 who are still saving for retirement. Where are they likely to need rebalancing?

Benz: Right, for them, I think maintaining a high equity allocation makes a lot of sense because the better return potential does tend to come from equities over time. For people in this age cohort, though, I would be looking closely at the international relative to US allocation, and a good benchmark for that is the US market constitutes roughly two-thirds of the global market cap, or like 67, 65, 67% today, and then non-US is all the rest. And I think that’s a good way to think about your own US relative to non-US allocation. Look at where you are. Most investors I encounter, whether younger investors, older investors, they have nothing like that large of an allocation to non-US equities. And then you might also look at some parts of the US style box that just haven’t performed as well. So small-cap value has kind of persistently underperformed the large-cap growth stocks, and I think that arguably there’s a pretty good value there, so investors might do a little bit of repositioning so they’re not so heavily tilted toward those mega-cap growth and technology stocks.

Why Investors Over 50 Should Add High-Quality Fixed Income to Their Portfolios

Giles: Right. Now, how about people over age 50? Which asset classes would they likely need to maybe top up?

Benz: Yeah, the key ones you’d want to be looking at would be high-quality fixed income, which, in our research on what helps diversify US equity exposure, we just come back to the same conclusion—is that high-quality US bonds really are superb ballast for equities. And the idea there is if you’re moving into your 50s or your 60s and you’re getting close to pulling funds from your portfolio, the reason you need safer assets and you need to be rebalancing into safer assets is that you have a bulwark of assets that you could pull from if your equity portfolio fell down and stayed down for an extended period of time. And so you’d want to be looking at those high-quality short- and intermediate-term bonds, as well as an allocation to cash if you’re getting quite close to retirement. If you are several years from retirement, I don’t think it’s sensible to allocate too much to cash beyond sort of your emergency reserves, but once you move within a few years of retirement, I do like starting to build out that bucket number one, that cash bucket.

How to Rebalance Without Triggering a Tax Bill

Giles: Absolutely. So you cautioned that rebalancing can trigger a tax bill, which I think is top of mind for lots of folks. Can you discuss that and whether there’s any way to rebalance it without triggering those tax bills?

Benz: Right, so inherent in rebalancing is that you’re selling your winners, and often, if you’re holding those holdings within your taxable account, to sell them and get into something else, well, you’ll trigger a tax bill. So you want to be careful not to do that, and if you have taxable accounts that need rebalancing, your best avenue if you are contributing, if you’re adding money to those accounts, is to use new contributions to help enlarge the thing that has shrunk as a percentage of the portfolio. That’s the best way to address rebalancing. In some market environments, people may be able to take tax losses and use those to offset appreciated winners that they’re selling. I don’t think many investors in this market will be able to find a lot of losers in their portfolio, but in some market environments, that can make sense. But generally speaking, to the extent that you’re rebalancing, concentrate those efforts in your tax-sheltered accounts where you can sell appreciated securities, swap into something else, and you won’t owe any taxes to do so as long as all of the money stays within that IRA or company retirement plan. So start there, maybe end there, rather than touching your taxable accounts.

Giles: Really helpful to think about as we head into the new year. Thanks, Christine.

Benz: Thanks, Margaret.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching.