1) Schedule-based approach: Rebalance at least once a year (some investors prefer every six months). 2) Threshold-based approach: Rebalance when your actual allocation drifts beyond a set range from your target, commonly 5–10 percentage points. 3) Quick example: Assume your target is 60% stocks / 40% bonds and you start with $60k in stocks and $40k in bonds. If stocks return +20% and bonds stay flat, you have $72k stocks and $40k bonds (total $112k), so stocks are about 64.3% and bonds about 35.7%—a drift of roughly 4.3 percentage points from target. If your drift threshold is 5%, you wouldn’t rebalance yet. If stocks rose 40% instead, you’d have $84k stocks and $40k bonds (total $124k), or about 67.7% stocks and 32.3% bonds—exceeding the 5% drift, so you’d rebalance by selling $9k of stocks and buying $9k of bonds to return to 60/40. 4) Practical tips: Rebalance in tax-advantaged accounts when possible to minimize taxes; consider costs and bid-ask spreads; automatic or rules-based rebalancing can help keep you on track without guessing.

Rebalancing is the process of bringing a portfolio back to its target asset mix by selling assets that have become overweight and buying assets that have become underweight. It helps maintain your intended risk level over time rather than letting one area dominate as markets move.