A surging portfolio can mask a dangerous imbalance, especially as you approach retirement. When markets climb, winning positions grow larger while lagging ones shrink. Your portfolio can drift far from its intended allocation without you noticing.
Here's what happens. Say you started with a 60/40 split between stocks and bonds. A bull market lifts stocks dramatically. Now you're at 75/25 without making a single trade. That extra stock exposure feels good during good times. It feels terrible during a correction.
This matters because your allocation exists for a reason. The 60/40 model assumes you can tolerate specific levels of volatility. It balances growth with stability. When your portfolio drifts to 75/25, you've accepted more risk than you planned. A 20% market drop hits harder. Your retirement timeline doesn't change, but your risk tolerance hasn't increased.
Rebalancing solves this. You sell some winners and buy some losers, bringing your portfolio back to target. This feels backwards during bull markets. You're selling what's working and buying what's struggling. But that's exactly the point. Rebalancing forces you to buy low and sell high.
The timing matters less than the discipline. Some investors rebalance annually. Others do it quarterly or when allocations drift beyond 5%. Pick a schedule and stick with it.
Tax considerations matter if you're holding investments outside retirement accounts. Selling appreciated securities triggers capital gains taxes. You might rebalance inside a 401(k) or IRA first, where there's no tax consequence.
Near retirees face extra pressure. You're transitioning from accumulation to distribution. Market downturns during early retirement years hit hardest because you need to withdraw money while values are depressed. A properly balanced portfolio, rebalanced regularly, cushions against this sequence-of-returns risk