Odds are good that, if you’re reading this, you practice (or are at least familiar with) some form of asset allocation.
The most familiar version of asset allocation is probably the 60/40 mix between stocks and bonds.
The premise is simple:
There’s no way to consistently predict which assets will outperform in any given year, so rather than risk underperformance of a single asset class, investors maintain a relatively steady exposure to a wide range of equities and fixed income.
In the short term, you’ll have some investments that outperform and some that underperform, but by periodically rebalancing, you are forcing yourself to take profits on the outperformers and reinvest the proceeds in the underperformers.
If you invest in mutual funds through your 401(k), especially if you use target date funds, you’re already doing this (more precisely, the fund managers are doing this on your behalf).
But if you aren’t invested in funds that rebalance on their own, the outperformance of international stocks this year means now is probably the time to do some rebalancing yourself.
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When Should You Rebalance Your Portfolio?
Most practitioners will make rebalancing as automatic as possible by doing so on a schedule. At most, you should rebalance quarterly, as anything more frequent than that might as well be active trading.
And you shouldn’t rebalance less than once a year, because not rebalancing defeats the purpose (taking profits when some investments are flying high and reinvesting when other asset classes are cheap).
Personally, I’m in favor of splitting the difference and rebalancing twice a year.
You don’t practice asset allocation because it’s as thrilling as trading individual stocks; you do it because it works over the long haul.
There are also times, however, when outperformance of a single investment should prompt you to rebalance, regardless of your normal schedule.
Like most things in the investing world, this is individually specific. But a good rule of thumb is to rebalance your portfolio if any position gets more than 2-5% outside its target allocation.
And if you haven’t reallocated this year, this is probably a good time to do it.
The following sample portfolio will show you what I mean.
The Moderate Asset Allocation Portfolio
This breakdown comes from the American Association of Individual Investors but is representative of what I’d consider an industry standard.
It’s a typical 60/40 portfolio, but the equity portion is further broken down into subclasses, which helps ensure that you don’t end up overexposed to one investing theme.
Our model portfolio is based on a starting dollar amount of $100,000 at the beginning of this year.
Target Allocation (%) | Asset Class (Investment) | Starting Allocation ($) | Current Allocation ($) | Current Allocation (%) |
20% | Large-cap stocks (SPY) | $20,000 | $22,624 | 20.5% |
15% | Mid-cap stocks (MDY) | $15,000 | $15,944 | 14.5% |
10% | Small-cap stocks (IJR) | $10,000 | $10,373 | 9.4% |
15% | International Stocks (VXUS) | $15,000 | $18,828 | 17.1% |
40% | Bonds (BND) | $40,000 | $42,548 | 38.6% |
If you started with $100,000 at the beginning of this year and invested in this moderate portfolio, your portfolio would now be worth $110,317 with dividends reinvested, a return of 10.3% so far in 2025.
That’s a strong year.
We’ve used low-cost ETFs that are designed to match their underlying indexes, although I want to note a few items: 1) We’ve opted to use IJR for our small-cap stock exposure instead of something like IWM (which tracks the Russell 2000) due to better historical returns (Tyler previously wrote about why IJR is a better way to play small-cap stocks); 2) the Vanguard Total Bond Market Index Fund (BND) is doing the heavy lifting and serving as our entire bond allocation for the sake of simplicity (we don’t need to get super granular with bonds as moderate investors); 3) the Vanguard Total International Stock Index Fund (VXUS) is serving the same role for our international exposure because it’s an ex-U.S. fund (no exposure to the U.S.) and offers a pure-play international investment.
As you would probably expect, most of our performance this year is being driven by large-cap U.S. stocks and international equities.
Large-cap stocks are outperforming because of mega-cap tech, and international stocks are benefiting from investors’ desire to add exposure outside of the U.S. for political and valuation reasons (what Carl Delfeld calls “The Great Rebalancing”).
That puts us slightly out of whack, although only international stocks are hitting our 2-5% threshold.
And odds are good that if you’ve rebalanced at any point (say, mid-year) in 2025, you’re still largely in line with your target allocation.
But if you haven’t, now’s a good time to do your rebalancing due to international outperformance. Here’s how.
How to Rebalance Your Portfolio
As you can see, international stocks have grown to 17.1% of the portfolio, while bonds haven’t kept pace and now represent only 38.6% of the whole portfolio.
If you wanted to rebalance by making just one move, you could sell your excess international holdings (selling $2,316 would bring you back to the 15% target) and use the proceeds to buy more BND (which would push that position to 40.7% of the total portfolio).
That’s a quick and dirty way to do it, but it puts you generally in line with your targets.
A more nuanced approach would have you selling the same amount of VXUS and then splitting the proceeds between BND, IJR, and MDY.
You could also take your large-cap exposure down from 20.5% to 20% by selling about $500 of your SPY holding, but being overweight large-cap stocks by only half a percent doesn’t demand immediate action; you can simply wait for your next scheduled rebalancing.
Even if you’re an active investor, maintaining a “core” portfolio like this can help your portfolio deliver long-term outperformance while allowing you the opportunity to use your non-core “explore” portfolio to buy individual stocks you’re bullish on.
And while it’s not quite “set it and forget it,” small moves like this are great for your overall portfolio health.
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