Portfolio Rebalancing in 2026: How Often, How Far, and How to Keep the Tax Bill Down

You choose an asset mix, such as 60% stocks and 40% bonds, because it matches how much risk you can take. Markets then change the mix for you. After a strong run in stocks, a 60/40 portfolio becomes 70/30 without a single trade, and it will fall further in the next bear market than the one you chose. Rebalancing moves it back.

This guide shows what drift did to a 60/40 portfolio from 2022 through 2025, what research says about how often to rebalance, how to rebalance with new cash and retirement accounts, what it costs in taxes when you must sell, and the wash sale traps that catch people who combine rebalancing with tax-loss harvesting.

What drift did from 2022 to 2025

An illustration: $1 million invested at the start of 2022, 60% in the S&P 500 and 40% in the Bloomberg U.S. Aggregate bond index, using annual total returns (stocks -18.1%, 26.3%, 25.0%, and 17.9% in 2022 through 2025; bonds -13.0%, 5.5%, 1.3%, and 7.3%). No fees or taxes.

Two things stand out. Rebalancing at the end of 2022 bought stocks after they fell, which helped in 2023. Over the whole period, though, the untouched portfolio earned about $13,000 more, because stocks beat bonds by a wide margin, and it finished with almost 70% in stocks. Rebalancing did what it is supposed to do: it kept risk near the level chosen, at a small cost in return during a strong stock market.

The extra risk matters in a bad year. In a 2008-style year (stocks down about 37%, bonds up about 5%), a 60/40 portfolio loses about 20% and a 70/30 portfolio about 24%; on $1.5 million, that is roughly $302,000 versus $365,000. Over longer periods drift goes further: Vanguard found that a 60/40 portfolio set at the end of 1989 and never rebalanced would have held 80% in stocks by the end of 2021.

How often, and how far to let it drift

The three common approaches:

• Calendar: rebalance on a fixed date, such as each January or on a birthday.
• Threshold: rebalance whenever an asset class drifts beyond a band, such as 5 percentage points from target.
• Hybrid: check on a schedule and trade only if the drift exceeds the band.

Vanguard's 2022 paper "Rational rebalancing" simulated many calendar and threshold strategies after transaction costs and found that the best ones rebalance neither too often (monthly or quarterly) nor too rarely (every two years or more). For investors who are not harvesting tax losses or tracking a benchmark closely, annual rebalancing came out on top. Vanguard's 2024 study of its target-date funds reached a different answer for a different case: with daily monitoring and institutional trading costs, rebalancing when drift reaches 2 percentage points, and only back to 1.75 points from target, controlled risk better than monthly or quarterly schedules.

For an individual, a reasonable default is an annual review plus an extra check after large market moves, trading only when an asset class is more than about 5 percentage points from target. For small allocations, a relative band works better: a 10% allocation to international small-cap stocks might be rebalanced if it moves 25% away from target, to below 7.5% or above 12.5%. Tighter bands mean more trades and, in taxable accounts, more realized gains.

Rebalance with cash flows first

Before selling anything in a taxable account:

• Trade inside 401(k)s, IRAs, and other tax-advantaged accounts, where rebalancing has no tax cost. Many 401(k) plans offer automatic rebalancing.
• Send new contributions, dividends, and interest to the underweight asset.
• When withdrawing, including required minimum distributions, take money from the overweight asset.

Cash flows alone rarely fix a large drift. In the never-rebalanced example, restoring 60/40 at the end of 2025 without selling would have required about $286,000 of new money on a $1.58 million portfolio. They work best for keeping a portfolio near target, once it is there.

What selling costs in a taxable account

Take the never-rebalanced portfolio from the example, assuming it ran from 2023 through 2025 in a taxable account and reached about $1.58 million with 70.9% in stocks. To return to 60/40, the owner would sell about $172,000 of stock. With a cost basis equal to the original $600,000 stock investment, about 46% of each dollar sold is gain, so the sale realizes about $79,000 of long-term gain.

• At the 15% long-term rate, the tax is about $11,900.
• With the 3.8% net investment income tax (modified adjusted gross income above $200,000 single or $250,000 joint), it is about $14,900.
• At the 0% rate, it is zero. Under 2026 brackets, long-term gains are taxed at 0% for taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly, which makes years with low income, such as early retirement, good times to rebalance.

Ways to reduce the bill:

• Sell only to the edge of the band (for example, to 65% stocks) rather than all the way back to target.
• Choose specific tax lots, selling the shares with the highest cost basis first, and avoid selling shares held one year or less, which are taxed as ordinary income.
• Pair gains with losses harvested elsewhere in the portfolio.
• If you give to charity, donate appreciated shares instead of cash. You generally avoid the gain and can deduct the market value if you itemize, then buy back the underweight asset with the cash you would have given.

Our guide to tax-efficient investing covers which assets belong in which accounts, which reduces future rebalancing taxes.

Rebalancing and tax-loss harvesting: the wash sale traps

When an asset class falls, rebalancing and loss harvesting fit together: you sell the losing fund to realize the loss and buy a similar, but not substantially identical, fund to keep the exposure. The wash sale rule disallows the loss if you buy substantially identical securities within 30 days before or after the sale. The traps:

• Your IRA counts. Under Revenue Ruling 2008-5, buying substantially identical shares in your IRA or Roth IRA within the window disallows the loss, and the loss is not added to the IRA shares' basis, so it is gone for good.
• Automatic purchases count too: dividend reinvestment and scheduled 401(k) or brokerage purchases of the same fund within the window can trigger a partial wash sale.
• "Substantially identical" is not defined precisely. Switching between funds that track different indexes, such as an S&P 500 fund and a total U.S. market fund, is common and generally considered lower risk; switching between two S&P 500 funds from different companies is less certain.

Our guide to tax-loss harvesting covers the mechanics in detail, and direct indexing covers harvesting at the level of individual stocks.

Letting someone else do it

Target-date funds, balanced funds, and most robo-advisers rebalance automatically. They work well inside retirement accounts. In taxable accounts, a balanced fund rebalances for you, but it holds its bonds in the taxable account and does not let you harvest losses asset class by asset class. Robo-advisers that harvest losses and rebalance with cash flows can handle much of this, for a fee. Our guides to index fund investing and choosing a financial adviser cover those choices.

An annual rebalancing checklist

1. List every account and its holdings, and calculate the current weight of each asset class across all of them.
2. Compare each weight with its target and band.
3. Rebalance inside tax-advantaged accounts first.
4. Redirect contributions, dividends, and withdrawals toward underweight assets.
5. In taxable accounts, harvest losses first, then sell gains only as far as needed, choosing high-basis lots.
6. Check the 30-day window across all accounts, including IRAs, spouses' accounts, and automatic purchases.
7. Revisit the targets themselves if your goals, timeline, or risk tolerance have changed. Our retirement planning guide covers how allocations typically shift over time.

This guide is for informational purposes only and does not constitute investment or tax advice. The portfolio figures are illustrations based on index returns, without fees, taxes, or cash flows; actual results differ. Tax brackets and rules are as of September 2026. Consult a qualified financial or tax adviser about your situation.