How to rebalance your portfolio in a soaring market

If you’ve chosen a target asset allocation—the mix of stocks, bonds, and cash in your portfolio— you’re probably ahead of many investors. But unless you’re investing in a set-and-forget investment option like a target-date fund, your portfolio’s asset mix will shift as the market fluctuates. In a bull market you might get more equity exposure than you planned, or the reverse if the market declines.

Rebalancing involves selling assets that have appreciated the most and using the proceeds to shore up assets that have lagged. This brings your portfolio’s asset mix back into balance and enforces the discipline of selling high/buying low. Rebalancing doesn’t necessarily improve your portfolio’s returns, especially if it means selling asset classes that continue to perform well. But it can be an essential way to keep your portfolio’s risk profile from climbing too high.

Where and how to rebalance

If it’s been a while since your last rebalance, your portfolio might be heavy on stocks and light on bonds. A portfolio that started at 60% stocks and 40% bonds 10 years ago could now hold more than 80% stocks.

Another area to check is the mix of international versus U.S. stocks. International stocks have led in 2025, but that followed a long run of outperformance for U.S. stocks, so your portfolio might lack international exposure. (Keeping about a third of your equity exposure outside the U.S. is reasonable if you want to align with Morningstar’s global market portfolio.)

Other imbalances might exist. Growth stocks have gained nearly twice as much as value stocks over the past three years. You might also be overweight in specialized assets such as gold and bitcoin thanks to their recent run-ups.

After assessing your allocations, decide where to make adjustments. You don’t need to rebalance every account—what matters is the overall portfolio’s asset mix, which determines your risk and return profile. It’s usually most tax-efficient to adjust within a tax-deferred account such as an IRA or 401(k), where trades won’t trigger realized capital gains. For example, if you’re overweight on U.S. stocks and light on international stocks, you could sell U.S. stocks and buy an international-stock fund in your 401(k).

If you need to make changes in a taxable account, you can attempt to offset any realized capital gains by selling holdings with unrealized losses. That might be difficult, as the strong market environment has lifted nearly every type of asset over the past 12 months. Only a few Morningstar Categories (including India equity, real estate, consumer defensive, and health care) posted losses over the trailing 12-month period ended Oct. 30, 2025. The average long-term government-bond fund lost about 8% per year for the trailing five-year period as of the same date, so those could offer opportunities for harvesting losses.

Required minimum distributions can also be used in tandem with rebalancing. Account owners have flexibility in which assets to sell to meet RMDs. If you own several different traditional IRAs, you could take the full RMD amount from any of them. Selling off holdings that appreciated the most can bring the portfolio’s asset mix back in line with your original targets.

Another option is funneling new contributions into underweight asset classes. Depending on the size of additional investments, this approach might take time, but it’s better than not rebalancing at all. This might also appeal if you’ve built up capital gains you don’t want to realize.

Final thoughts

Rebalancing is especially important in extremely volatile times. But even in a more gradual bull market like in recent years, it’s important for keeping a portfolio’s risk level in check, especially for investors as they approach retirement and start spending their portfolios.

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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance

Amy C. Arnott, CFA is a portfolio strategist for Morningstar.