How do I rebalance a portfolio back to my target?

To rebalance, value the holdings in the portfolio you are managing at one common date, calculate the dollars implied by your current target and compare them with what you hold. Then choose permitted trades, new contributions or both, accounting for costs and taxes. First confirm that the target still fits the purpose of the money.

The SEC's asset-allocation guidance describes rebalancing as returning a portfolio to its intended mix after holdings grow differently. The target remains a personal decision involving time horizon and risk tolerance. No allocation in the example below is a recommendation for readers.

Define which money the target covers

Consider a wholly fictional investment portfolio with a chosen target of 55 percent stocks and 45 percent bonds. Its separate household emergency money and near-term spending reserve are outside this portfolio and stay outside the calculation. The model assigns no return or safety guarantee to either asset category.

Initially, it holds $55,000 in stocks and $45,000 in bonds. At the review date, stock holdings are worth $77,000 and bonds $43,000. All observations use the same time; distributions have been reinvested within those totals. There have been no external additions or withdrawals.

Total portfolio value is $120,000. Stocks are now about 64.17 percent, and bonds about 35.83 percent. The target has not changed merely because one holding grew more.

Calculate the trade at the current total

At $120,000, the chosen 55 percent stock target is $66,000. The 45 percent bond target is $54,000. Stocks are $11,000 above their target; bonds are $11,000 below.

In a frictionless version with no fees, taxes, price changes during execution or restrictions, selling $11,000 of stocks and buying $11,000 of bonds reaches $66,000 and $54,000. No external money is added. This is a calculation, not an order placed or a prediction that either category will outperform.

The completed trade would change exposure while leaving the supplied total value unchanged. Calling it an $11,000 withdrawal would confuse movement within the portfolio with money leaving it.

Recalculate when new money enters

Now use an alternative branch: the investor has $10,000 genuinely available to contribute, after protecting other obligations, and initially wants to avoid selling anything. Adding all $10,000 to bonds gives $77,000 stocks and $53,000 bonds, for a $130,000 total.

The new total changes the target dollars. Fifty-five percent of $130,000 is $71,500, and 45 percent is $58,500. Stocks still exceed the chosen target by $5,500. The all-bond contribution has moved the allocation toward target, but stocks remain about 59.23 percent.

To hit the target exactly with that $10,000 contribution under the same frictionless assumptions, the investor would also sell $5,500 of stocks and buy another $5,500 of bonds. The resulting $71,500 and $58,500 match the new target.

Do not keep using the original $66,000 and $54,000 target dollars after contributing money. Percentages apply to the portfolio total then being allocated.

Find the contribution-only amount

How much new money, all placed in bonds, would achieve 55/45 without selling the existing $77,000 stocks?

The final total must make $77,000 exactly 55 percent. Dividing $77,000 by 0.55 gives $140,000. Against the current $120,000 portfolio, that requires $20,000 of new money. Bonds would become $63,000: the existing $43,000 plus $20,000.

The stated investor has only $10,000 available. The $20,000 is therefore a calculated requirement, not a funded option. The investor can use the available contribution and accept a remaining deviation, investigate an appropriate trade or review the plan. Household money assigned elsewhere does not become available just because the equation would work with it.

Put real trading costs and holdings back in

The numerical examples deliberately exclude costs and taxes. Actual trades may create them, and prices can change while instructions execute. Identify the assets and tax lots, restrictions, settlement and available cash before acting. Recompute the attainable allocation after relevant costs rather than pretending every dollar sold can be reinvested.

Also examine what the categories contain. Two stock funds may hold many of the same companies, and separate assets may share an economic dependency. The shared-dependence guide explores that broader question. Achieving target percentages does not by itself establish diversification within them.

Use an agreed review rule that fits the portfolio rather than changing targets in response to whichever asset just performed best. A calendar review or a chosen drift threshold can prompt a check; neither predicts the next return. The investor still needs to decide whether the original purpose, horizon and ability to bear loss have changed.

Record the decision and the result

Keep the covered accounts, valuation date, target, current dollars, available contribution, proposed trades, costs and intended ending allocation together. After execution, compare actual quantities and values with the intended result. A proposed trade and an observed allocation are separate records.