Portfolio Rebalancing Math: How a 60/40 Portfolio Drifts and What to Trade
October 29, 2026
Asset allocation sets the mix of stocks, bonds, and other assets in a portfolio, such as 60% stocks and 40% bonds. Over time, differing returns push the actual mix away from the target. Rebalancing means trading to restore the target mix. It controls risk: without it, a portfolio that was designed to be moderate can become much more aggressive after a bull market.
Suppose you start with $100,000 in a 60/40 portfolio: $60,000 in stocks and $40,000 in bonds. After a year, stocks gain 20% and bonds gain 2%. Stocks are now worth $72,000 and bonds $40,800, a total of $112,800. The allocation has drifted to 63.8% stocks and 36.2% bonds.
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Open the Investment Calculator →Calculating the Trade
Target stock value = target weight × total portfolio = 0.60 × $112,800 = $67,680. Current stock value is $72,000, so you need to sell $4,320 of stocks. Target bond value = 0.40 × $112,800 = $45,120. Current bonds are $40,800, so buy $4,320 of bonds. The trade restores the 60/40 split. In general, trade amount = current value − target weight × total, for each asset.
With three or more assets, calculate each target and trade the differences. The trades sum to zero when no money is added or withdrawn.
| Stocks | Bonds | Total | |
|---|---|---|---|
| Start | $60,000 (60%) | $40,000 (40%) | $100,000 |
| After one year (+20%, +2%) | $72,000 (63.8%) | $40,800 (36.2%) | $112,800 |
| Target at 60/40 | $67,680 | $45,120 | $112,800 |
| Trade | Sell $4,320 | Buy $4,320 | $0 |
Rebalancing With New Money
You can often rebalance without selling by directing new contributions or dividends to the underweight asset. If you add $10,000 to the example portfolio, the new total is $122,800. The target stock value is $73,680, which is only $1,680 above the current $72,000, and the target bond value is $49,120, which is $8,320 above the current $40,800. Putting $1,680 in stocks and $8,320 in bonds restores the target with no selling and no taxes. Similarly, when making withdrawals in retirement, take from the overweight asset.
When to Rebalance
Calendar rebalancing happens at set intervals, such as annually. Threshold rebalancing occurs when an asset drifts beyond a band, such as 5 percentage points from the target (a 60% target would trigger at 65% or 55%), or 20% relative to its target weight. Studies suggest that annual or threshold-based rebalancing captures most of the risk-control benefit, and that rebalancing more often adds costs without much gain. Rebalancing does not necessarily increase returns; its main purpose is to keep risk in line with your goals. In trending markets, it can reduce returns, and in choppy markets it can increase them.
Taxes and Costs
In taxable accounts, selling winners triggers capital gains tax. Rebalance inside tax-advantaged accounts such as IRAs and 401(k)s where trades are not taxed, use new contributions, donate appreciated shares, and sell lots with the highest cost basis first to minimize the gain. Consider trading costs and bid-ask spreads. Target-date funds and balanced funds rebalance automatically, which may suit investors who prefer simplicity.
Frequently Asked Questions
What is portfolio rebalancing?
Trading assets to restore your target allocation after market moves cause drift.
How often should I rebalance?
Annually, or when an asset class drifts more than about 5 percentage points from its target.
Does rebalancing increase returns?
Not necessarily. Its main benefit is controlling risk.
How can I rebalance without paying taxes?
Use new contributions, tax-advantaged accounts, or direct dividends to underweight assets.
How do I calculate the amount to trade?
Subtract the target weight times total value from the current value of each asset.