Rebalancing Strategies

A portfolio initially allocated 70 percent stocks and 30 percent bonds will drift over time as stocks and bonds earn different returns. After a strong stock market year, the portfolio might be 80/20—now carrying more risk than intended. After a crash, it might be 55/45—too conservative for the investor's goals. Rebalancing restores the target allocation by selling winners and buying losers. Research by Vanguard shows that rebalanced portfolios achieve similar returns to unrebalanced portfolios but with meaningfully lower volatility, because rebalancing mechanically enforces the discipline of buying low and selling high.