Last updated: September 2026 · Reviewed by Miguel Cibeira
This article is for informational purposes only and is not investment advice. See our full Disclaimer for details.
Every ETF portfolio drifts. A simple 70/20/10 split across U.S. stocks, international stocks, and bonds doesn’t stay 70/20/10 on its own — a good year for stocks and a flat year for bonds can push that same portfolio to 78/15/7 within twelve months, with no action from you at all. Rebalancing is the process of bringing it back. Here’s how to actually do it, step by step, without guessing or overtrading.
Step 1: Know What You’re Actually Targeting
Rebalancing only makes sense once you have a target to rebalance toward — a specific percentage split across asset classes (U.S. stocks, international stocks, bonds, and so on), not a list of tickers. If you hold VTI, VXUS, and BND, your target might be 60% VTI / 30% VXUS / 10% BND. That target should come from your own timeline and risk tolerance, covered in more depth in our Asset Allocation guide — this article assumes you already have one and focuses purely on the mechanics of maintaining it.
Step 2: Pick a Trigger — Calendar or Threshold
There are two basic ways to decide when to rebalance:
- Calendar-based: rebalance on a fixed schedule — once a year, or once a quarter — regardless of how far your portfolio has drifted.
- Threshold-based: rebalance only when an asset class drifts past a certain band, commonly a 5-percentage-point absolute move or a 25% relative move from its target, whichever comes first (the “5/25 rule” many financial planners use as a rule of thumb). A 10% bond target that drifts to 12.5% would trigger a rebalance under the 25%-relative leg of that rule; a 60% stock target would need to move a full 5 points, to 65% or 55%, to trigger the absolute leg.
Vanguard tested this question directly across 92 years of market history, comparing strategies from monthly monitoring with a 0% threshold (rebalance at any deviation at all) to annual reviews with a 10% threshold. The gap in effort was enormous — the monthly/0% approach triggered more than 1,100 separate rebalancing events over that period, versus just 14 for the annual/10% approach — but both delivered the same 8.20% annualized return. Vanguard’s own conclusion: no single threshold or frequency is optimal for everyone, and consistency matters more than precision. Pick a rule you’ll actually stick with over decades, not the theoretically perfect one you’ll abandon in year three.
Source: Vanguard, “Getting Back on Track: A Guide to Smart Rebalancing” (92-year historical analysis of rebalancing frequency and thresholds).
Step 3: Rebalance Inside Tax-Advantaged Accounts First
If you hold ETFs across more than one account — say, a taxable brokerage account and a Roth or traditional IRA — do your rebalancing trades inside the tax-advantaged accounts before you touch the taxable one. Selling an appreciated ETF inside an IRA triggers no capital gains tax at all; doing the identical trade in a taxable account can trigger a real tax bill. Vanguard’s research found that prioritizing tax-advantaged accounts for rebalancing trades improved after-tax outcomes by roughly 44 basis points a year on average — a meaningful, compounding difference for essentially free, just by choosing where you make the trade rather than changing what you’re targeting.
Step 4: Use New Money Before You Sell Anything
The cheapest way to rebalance — no taxes, no trading costs, no need to sell a single share — is to direct new contributions and reinvested dividends toward whichever asset class has fallen below target. If your bond allocation has drifted from 10% down to 7%, your next few contributions can go entirely into your bond ETF until the split is back in line, while your existing stock ETFs stay untouched. This works especially well for anyone still actively contributing to their portfolio, which is most people who aren’t yet retired.
Step 5: If You Do Need to Sell, Be Selective in Taxable Accounts
Sometimes new money isn’t enough and you actually need to sell part of an overweight position in a taxable account. When that happens, most brokers let you choose which tax lots to sell rather than defaulting to first-in-first-out. Selling your highest-cost-basis shares first minimizes the taxable gain on that specific sale. If some of your lots are sitting at a loss, that overlaps directly with tax-loss harvesting — worth reading together with our step-by-step tax-loss harvesting guide if you’re rebalancing and sitting on losses in the same account at the same time.
A Worked Example
Say you started with a $60,000 portfolio targeting 60% VTI, 30% VXUS, 10% BND. After a strong year for U.S. stocks and a soft one for international and bonds, here’s where it might actually sit:
| Fund | Target | Current | Drift | Action |
|---|---|---|---|---|
| VTI (U.S. stocks) | 60% / $36,000 | 67% / $40,200 | +7 pts | Sell ~$4,200 or direct new contributions elsewhere |
| VXUS (international) | 30% / $18,000 | 25% / $15,000 | −5 pts | Buy ~$3,000 |
| BND (bonds) | 10% / $6,000 | 8% / $4,800 | −2 pts | Buy ~$1,200 |
Under the 5/25 rule described above, the VTI drift (+7 points, and well over 25% relative to its 60% target isn’t required here since the 5-point absolute threshold alone is already crossed) would trigger a rebalance. In an IRA, you’d simply sell ~$4,200 of VTI and split it between VXUS and BND. In a taxable account, you’d first check whether upcoming contributions could close most of that gap on their own before selling anything.
Common Mistakes to Avoid
- Rebalancing too often. Checking your allocation weekly and trading on tiny moves mostly generates taxes and trading friction, not better returns.
- Ignoring account type. Selling in a taxable account first, out of habit, when the identical trade was available tax-free in an IRA.
- Forgetting new contributions exist. Selling a winner to fund an underweight position when next month’s contribution could have done the same job for free.
- Panic-rebalancing during a crash. A sharp stock selloff will push your allocation toward bonds on its own (as stocks fall relative to bonds); reflexively “rebalancing” into more stocks right after a crash is a legitimate strategy some investors choose deliberately, but it’s a different decision than routine maintenance and deserves to be made on purpose, not by habit.
Frequently Asked Questions
How often should I actually rebalance my ETF portfolio? There’s no single correct frequency. Vanguard’s own research found that a monthly check with a 0% threshold and an annual check with a 10% threshold produced the same long-run annualized return over 92 years, despite one generating nearly 80 times more trades than the other. An annual check paired with a 5/25 threshold is a reasonable, low-effort default for most long-term investors.
Does rebalancing actually improve my returns? Not reliably, and that’s not really the point. Rebalancing is a risk-control tool, not a return-boosting one — it keeps your portfolio at the risk level you originally chose instead of quietly drifting toward whatever asset class happened to perform best recently.
Do I need to rebalance manually if I use a robo-advisor? Most robo-advisors rebalance automatically using threshold-based rules similar to the ones described here, so manual intervention usually isn’t necessary — check your specific platform’s policy to confirm.
Can rebalancing trigger the wash-sale rule? It can, if you sell an ETF at a loss and buy back the same or a “substantially identical” fund within 30 days. Buying a similar-but-not-identical fund (a different S&P 500 fund from a different issuer, for example) during that window is one common way investors navigate this — see our full tax-loss harvesting guide for the details of the wash-sale rule itself.
Should I rebalance during a market crash? That’s a deliberate strategic choice (sometimes called “rebalancing into weakness”) rather than routine maintenance, and it means buying more of whatever just fell in value. Some investors do this on purpose as part of their plan; others prefer to wait for recovery. Neither is objectively correct — it depends on your own risk tolerance and time horizon.
What if my portfolio has more than three funds? The same mechanics apply regardless of how many funds you hold — set a target percentage for each, pick a trigger, and prioritize tax-advantaged accounts and new contributions before selling anything in a taxable account. More funds just means more rows in the table.
This article is provided for general informational and educational purposes only and is not a recommendation to buy or sell any security. Figures referenced above reflect the cited sources as of the “last updated” date and are subject to change. Always do your own research and consult a licensed financial advisor or tax professional before making investment decisions. Read our full Disclaimer and Privacy Policy for more information.
About the Author
Miguel Ángel Cibeira researches and writes every article on The Fund Atlas personally, sourcing data directly from fund issuers, the IRS, the SEC, and the Federal Reserve. He is not a licensed financial advisor, broker-dealer, or RIA — this site offers independent research and general information, not personalized financial advice. Read the full bio →