Every well-constructed portfolio starts with a plan. Based on your goals, time horizon, and risk tolerance, your advisor helps build a portfolio allocated across asset classes, including stocks, bonds, real estate, international equities, and alternatives. A more aggressive investor might hold 80 percent in equities and 20 percent in fixed income, while a more conservative one might flip that ratio. Whatever the mix, your asset allocation should never be random. It should be a deliberate strategy, developed with your advisor, to pursue your goals and long-term growth potential while aligning with your comfort level with risk and volatility.
Once you’ve built a portfolio with the proper allocation, you might think your work as an investor is done. However, market movements can alter your portfolio’s weight over time, underscoring the importance of rebalancing.
The Reality of Portfolio Drift
Imagine a scenario where your portfolio is allocated 60 percent to stocks and 40 percent to bonds. Over the next two years, equities surge while bonds remain relatively flat. Suddenly, without any action on your part, your portfolio might look more like 70 stocks/30 bonds. That’s portfolio drift. With a greater percentage of your portfolio now in equities, you have taken on more risk than your original plan intended.
This phenomenon is completely natural. In fact, it’s often the result of investments performing well over time. However, without periodic attention, your portfolio can stray meaningfully from your desired risk profile, and that misalignment can become more significant during market fluctuations.
The Case for Rebalancing
Rebalancing is the process of returning your portfolio to its target allocation. While the goal is straightforward, the process of getting there can vary significantly.
The most obvious way to rebalance a portfolio is to sell assets that have grown beyond their target weight and buy more of the underweighted ones. Although this approach can make sense at times, it often isn’t the best path because selling an appreciated asset triggers capital gains taxes.
For many clients, we recommend a different approach: rebalancing by adding equity to the underperforming asset classes rather than selling the ones that are outperforming. If you’re making regular contributions to your portfolio, or if dividends and interest are being reinvested, those dollars can be directed toward the asset classes that have fallen below their target weight, bringing the portfolio back into balance without triggering a single taxable sale.
Intentionally investing more in assets that have underperformed may feel counterintuitive, but it’s a key principle of diversification. Market segments perform differently at different times, which is why broad exposure across the market is important. It’s natural and even expected for some parts of a portfolio to lag while others lead. When you consider that asset class leadership has historically rotated over time, rebalancing into an underperforming asset class looks less like a concession and more like a disciplined way to stay aligned with your long-term strategy and prepare for what comes next.
How Often Should You Rebalance?
There’s no single right answer to how often an investor should rebalance their portfolio. We often recommend an annual review, although some investors prefer a quarterly cadence. What matters most is establishing a consistent structure in which rebalancing is treated as part of the portfolio’s natural lifecycle. Rebalancing should always follow a set plan, not be a reaction to the market’s performance.
That last point is essential. Rebalancing should always be thought of as a systematic process — not as a chance to second-guess your overall investment strategy. If an asset class has had a difficult quarter — or even several difficult quarters — that alone is not a compelling reason to abandon it. Markets reward patience.
Maintaining a diversified portfolio through stretches of uneven performance is a strategy that rewards long-term patience. Rebalancing supports that discipline by keeping risk in check.
Location Matters: Tax-Advantaged Accounts Change the Calculus
Not all portfolio rebalancing exercises are the same. One key variable is the tax status of the account holding the assets.
In taxable accounts, selling appreciated securities to rebalance triggers capital gains taxes. In this case, investing more in underperforming assets is often the most tax-efficient, sound approach to rebalancing.
The story changes for tax-free accounts like 401(k)s and IRAs. Since there are no immediate tax consequences to selling and rebuying within these accounts, you have considerably more flexibility. Investors who want to rebalance more actively or make more significant allocation shifts may find it far more efficient to do so within their tax-advantaged holdings. This can be a meaningful advantage, although it’s still worth remembering the general principle of trusting your overall investment selection rather than responding entirely to short-term market shifts.
Keeping Your Portfolio Aligned for the Long Haul
Designing a portfolio is the beginning of your investment process, not the end. Over time, markets will shift, and the performance of certain asset classes will vary. Without ongoing attention, even the most well-crafted allocation can drift far from its original intent.
At Legacy Private Wealth Partners, portfolio design is only the starting point of the investment process. We actively monitor and manage our clients’ portfolios over time, ensuring that investments remain aligned with goals, risk tolerance, and vision for the future. We take the time to truly get to know our clients and meet regularly, so that if their goals change, we are prepared to adjust our strategy accordingly.
Get in touch with us today if you’d like us to review your current portfolio to see whether it’s still aligned with your goals and target allocation.
The information provided here is for general informational purposes only and does not constitute tax advice. Readers should consult a qualified tax professional for guidance specific to their individual circumstances.
Advisory Services offered through Concurrent Investment Advisors, LLC, an SEC Registered Investment Advisor. Brokerage services offered through Purshe Kaplan Sterling Investments (PKS), Member FINRA/SIPC, Headquartered at 80 State Street, Albany, NY 12207. PKS and Concurrent Investment Advisors, LLC d/b/a Legacy Private Wealth Partners are not affiliated companies.
