Portfolio rebalancing is the process of realigning the weightings of the assets in your portfolio to match your original target allocation. Over time, as different assets earn different returns, your portfolio naturally drifts away from its intended mix. Stocks may outperform bonds for a stretch, leaving you with a riskier portfolio than you planned.

Most financial advisors recommend rebalancing when any asset class drifts more than 5 percentage points from its target, or on a regular schedule such as quarterly or annually. Rebalancing forces a disciplined approach of selling high and buying low, as you trim the positions that have grown beyond their target and add to those that have lagged.

Tax considerations matter when rebalancing in taxable accounts. Selling appreciated assets triggers capital gains taxes, so many investors prefer to rebalance by directing new contributions toward underweight asset classes rather than selling overweight ones. In tax-advantaged accounts like IRAs and 401(k)s, you can rebalance freely without tax consequences.