Is This the Right Time to Rebalance Your Portfolio?

Suppose you bought an S&P 500 (SNPINDEX: ^GSPC) index fund a decade ago and never touched it. Congratulations. Your money has more than tripled as of this writing on May 7, 2026 (318% with reinvested dividends, to be exact). Whether you picked the Vanguard 500 Index Fund (NYSEMKT: VOO), the SPDR S&P 500 ETF (NYSEMKT: SPY), or the iShares Core S&P 500 (NYSEMKT: IVV), your gains will be a rounding error away from the underlying index.

Your portfolio of specific stocks probably looks nothing like it did in 2016, though. Some positions have ballooned; others have shriveled. So is it time to trim the winners and bulk up the laggards?

Why rebalancing works

Rebalancing keeps your portfolio aligned with your original risk tolerance. If a single stock has grown from 5% of your holdings to 15%, you're now more exposed to that company's fortunes than you intended.

Selling some shares and redirecting the proceeds to underweighted positions restores your target allocation. This approach also enforces a "sell high, buy low" discipline that can be difficult to maintain through willpower alone.

That's not all -- you're also locking in some of those hard-won gains.

Why you might skip it

Selling winners to buy underperformers can mean cutting your best ideas short. If a stock has tripled because the underlying business is thriving, trimming it purely for allocation purposes may cost you future gains. That winner might keep winning, which means cutting your future profits with every dollar you move away today.

If you're doing this in a taxable account, the IRS will also happily take a cut of your gains. Sometimes the best rebalancing strategy is to do nothing at all.

Image source: Getty Images.

When to rebalance (if you do)

People rebalance all the time. There's New Year's resolution energy and tax-season guilt. A market crash could make a pricey market darling look cheap. A bull run may have made one position uncomfortably large.

Personally, I lean toward rebalancing when something material changes for a company I own heavily, not because the calendar says so. But there's no objectively correct answer here.

Know thy portfolio, investor

I rebalance less often than most investors, preferring to let winners keep winning. You might prefer a more disciplined approach, and that's fine. The market doesn't get to decide when you rebalance; you do.

You know your portfolio, your risk tolerance, and your financial needs better than any article or Wall Street Farmer's Almanac ever can.

If rebalancing makes sense for your situation, go ahead. Now is as good a time as any. I would say the same near any bull market top, bear market bottom, and the points in between. After all, nobody knows what the stock market will do tomorrow, next week, or next year. The only stable truth is that the market usually goes up eventually, no matter how many speed bumps it hits along the way. That 318% decade didn't happen in a straight line.

Anders Bylund has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.