How to Rebalance Your Portfolio Before 2027

Key Takeaways

• Rebalance to bring your portfolio’s asset allocation back in line with your targets.
• Review your portfolio annually, and consider rebalancing when major asset allocations drift by 5 percentage points.
• Start with tax-sheltered accounts, and use RMDs to help adjust your portfolio.
• Check your stock holdings for heavy concentrations in US stocks, large-growth stocks, and technology.
• As retirement nears or begins, consider holding seven to 10 years of anticipated portfolio withdrawals in cash and high-quality short- and intermediate-term bonds.

Djeljosevic: Hi, I’m Valentina Djeljosevic for Morningstar. As the year winds down, many investors’ portfolios might benefit from rebalancing. Today, Christine Benz will share her guidance on the key rebalancing decisions to consider before the end of the year. Christine is the co-host of The Long View podcast and the author of How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Thanks for being here, Christine.

Benz: Valentina, it’s great to see you.

What Is Portfolio Rebalancing, and Why Does It Matter?

Djeljosevic: Before we get into the logistics of rebalancing a portfolio, tell us what that is and why it can benefit investors.

Benz: Rebalancing basically means that you are looking at your portfolio’s asset allocation today and comparing that to whatever your target is for it. And so invariably, those two things will get out of whack due to market performance, or maybe if you’ve made changes behind the scenes in your portfolio.

The idea is that you’re periodically taking a look at how those two things compare. And if you’re out of whack, and typically what people see in a normal market cycle is that the higher-risk assets take up a bigger and bigger share of their portfolio as the years go by. You’re comparing where you are today to that target. And so rebalancing typically entails taking the higher-risk assets out of your portfolio, adding to those that are lower-risk in order to bring your asset allocation back in line with targets.

There might be certain market environments where you’d actually want to do the opposite, where your risky assets are the ones that have shrunk in importance. So, if the market’s been bad for equities, oftentimes rebalancing would entail topping up those depreciated equity exposures. But right now, the main rebalancing move for many households is to take some risk out of their portfolios.

I was recently looking at a portfolio that was just 60% US equity, 40% bonds five years ago would now be about three-fourths in US equities with the remainder in bonds. And given that many people are saving and investing for retirement, they’re probably getting closer to needing their money, and their portfolios have become more risky. So, that’s the key value to looking at rebalancing today, that idea of taking some risk out of your portfolio. And a positive side effect is that yields are much higher on those safer investments than they were five years ago. So, you’re able to avail yourself of those higher yields that are available today on cash investments, on high-quality fixed-income investments.

Djeljosevic: If somebody wants to set it and forget it, and they never rebalance, what happens?

Benz: Well, your portfolio over many market cycles will become more risky as the years go by. The one caveat would be if you’re using something that rebalances for you, so you’re using a target-date fund, or you’re using a static-allocation fund, for example, that itself is rebalancing back to a target, that can be a lovely way for hands-off-type investors to ensure that their portfolios don’t become more and more aggressive as the years go by.

Djeljosevic: You have to know what you own.

Benz: Exactly.

When Should You Rebalance Your Portfolio?

Djeljosevic: How about the timing? Is it important for investors to rebalance at the end of every year?

Benz: Not necessarily, Valentina. I think a good practice is to do a good once-annual review, maybe twice annually. Look at what you’ve got.

We’ve got some great tools, obviously, on Morningstar Investor for doing an X-ray of your portfolio’s asset allocation. Look at where you stand today, compare that to your target, maybe even revise your target as the years go by, and you can use target-date funds as kind of a guide for your retirement assets to help you establish how you want to be positioned. But do that review and then set targets for when you will rebalance.

So, a really nice threshold to think about is: I’ll rebalance if my allocations to the major asset classes veer by 5 percentage points relative to my targets. Say my target equity allocation is 70% of my portfolio, but I’m at 78% today, and I’ve set 5% as my rebalancing interval, or 5 percentage points as my rebalancing interval, that would be a cue for me to rebalance.

I like that interval-based rebalancing versus the time-specific rebalancing. To me, that just makes sense as a way to maintain your portfolio’s asset allocation without being too busy and in the weeds with portfolio management.

Which Accounts Should You Rebalance First?

Djeljosevic: We talked about what and we talked about when. Now, let’s talk about the where of rebalancing. I know some account types are better than others. Where should investors start, and what should they avoid?

Benz: That’s such an important point because if we’re selling appreciated securities, especially if we’re selling parts of our portfolios that have performed well, well, that’s a tax bill if I’m doing that in my taxable account, if I’m realizing winners, realizing gains.

So, for most of us, we should start our rebalancing efforts within our tax-sheltered accounts, and you should be able to move the needle with your portfolio’s asset allocation by making changes there. Ideally, you wouldn’t do a lot of rebalancing within your taxable accounts. And I would also say, Valentina, for older adults who are subject to required minimum distributions, that’s a really nice way to fulfill your obligations to the IRS. You have to take those RMDs, but you can also make some portfolio adjustments around the margins. It’s a really nice strategy to bear in mind. People love to grumble about their RMDs and especially the tax implications, but it’s a nice way to feel that you are improving your portfolio along the way.

Rebalancing When Retirement Is Still Years Away

Djeljosevic: So, that was the where. Now, let’s do the how. A person’s life stage is an important factor here. Let’s start with somebody who is 10 or more years from retirement. If they’re rebalancing, what should they focus on?

Benz: They should focus on that baseline allocation to the major asset classes. That’s a starting point, but for people with several, many years to retirement, they should be running with fairly equity-heavy portfolios. The key thing I would urge them to focus on today would be the composition of that equity allocation. A big one to look at would be your allocation to US versus non-US stocks. Non-US stocks have had a pretty good run, but most US investors’ portfolios are still pretty heavily tilted toward the US market. And you can use the composition of a total world stock index as a benchmark when deciding how much to have in US stocks relative to non-US. Again, do that X-ray, see where you stand. But the total world stock index currently is about 63%, upward of 60% in US stocks today, the remainder in non-US stocks. Most US investors aren’t there, and I think that’s a pretty good benchmark when deciding how much to have inside the US and outside the US.

I would start there. I would also look at the [Morningstar] Style Box exposure. So we’ve had pretty equally distributed market gains so far in 2026, but for investors who have been hands-off with their portfolios for several years, they’re probably still pretty concentrated in the growth column of the style box, large growth, specifically in technology stocks, especially. So, look at that; look at your style box composition. Also look at your portfolio sector exposure just to make sure that you’re not making any big inadvertent bets. Now you might have some specific sector bets that you wish to have on an ongoing basis, but just make sure that there’s nothing going on there that you’re not aware of and not comfortable with.

Rebalancing Near and During Retirement

Djeljosevic: What about for someone who is already retired or very close to it? Why is it so important for them to rebalance, and where should they concentrate their rebalancing efforts?

Benz: This is why rebalancing is mission-critical for people at this life stage, because the key thing you want to protect yourself against if you’re thinking about a retirement portfolio is coming into retirement with a portfolio that has too much risk in it, it’s too heavy on equities, and equities get clocked right out of the box, potentially. So, I love the idea of building kind of a bulwark against that possibility. I’m not saying that a bear market is going to materialize anytime soon, but if you have an allocation to cash, an allocation to high-quality, short-, and intermediate-term bonds, I like the idea of looking at my anticipated portfolio withdrawals and earmarking roughly seven to 10 years’ worth of anticipated portfolio spending for that runway of safer assets. And that way, if a bear market shows up early in my retirement, I’m protected. I have safer assets that I can pull from during that period to ensure that I’m not having to sell those equity assets and realize losses when stocks are in a trough.

That’s why I would urge anyone over 50 to take a look at their portfolio’s baseline asset allocation. You can take advantage of those higher yields that are now available by shifting at least some of your portfolio into safer assets. Not all of it. You still need growth in that portfolio. You still need the long-term potential higher returns of equities, but you do need that allocation to safer assets.

Djeljosevic: Understood. Thank you, Christine, for breaking it down for us.

Benz: Thank you, Valentina.

Djeljosevic: For practical financial guidance and insights throughout the year, subscribe to Christine’s newsletter. And when you’re ready to show your year-end to-do list who’s boss, visit Morningstar.com. Thanks for watching.

Morningstar’s Portfolio X-Ray

If you suspect it might be time to rebalance, start by getting a handle on your portfolio’s current asset mix. Morningstar’s Portfolio X-Ray tool can provide a quick overview of the combined asset exposure for your overall portfolio, as well as a detailed analysis of the individual holdings within it. You’ll be able to pinpoint areas where you’ve drifted away from target levels, such as being overweight in a given sector, and the specific securities that impact that exposure. Then some remodeling might be in order.