Lesson 3 of 4 · 8 min read
Rebalancing: buy low, sell high — automatically
Over time your carefully chosen mix drifts off. Rebalancing sets it back — with a surprising benefit.
Why your mix drifts off on its own
Say you chose 70% stocks, 30% bonds. If stocks rise sharply, that part grows to, for example, 80%. Your portfolio is now riskier than you intended — without you doing anything. That's how risk creeps in.
Rebalancing sets the mix back
Rebalancing means: sell what has grown too large and buy more of what has become too small, until you're back at your target mix. In doing so you restore the risk level you deliberately chose.
In practice
Target 70/30, but due to price gains you're at 80/20. You sell some stocks and buy more bonds until it's 70/30 again.
The sneaky benefit
Notice what you're doing: you sell what has risen (high) and buy what lagged behind (low). Rebalancing therefore automatically forces you to 'buy low, sell high' — exactly the opposite of what emotion whispers to you (buying when it's euphoric, selling in panic).
Stocky says
Rebalancing is mainly a discipline tool: it takes the emotion out of your decisions and keeps your risk under control.
How often, and when?
Two common methods: at fixed moments (e.g. once a year) or when a category drifts too far (e.g. 5+ percentage points from target). More often isn't better — it costs transaction fees and sometimes tax. Once a year is enough for most investors.
Calm, not busy
Beating your portfolio by constantly trading rarely works. Choosing a target mix, contributing periodically (DCA, you already know that) and rebalancing once a year is boring — and that's exactly why it's effective. Boring and consistent beats exciting and impulsive.
Discipline beats predicting
You don't have to time the market. A fixed allocation plus yearly rebalancing keeps your risk in check and forces you to buy more cheaply.
Remember this
- Due to price movements your mix drifts off on its own and unwanted risk creeps in.
- Rebalancing sets the mix back to your target split and restores your chosen risk level.
- It automatically forces you to 'buy low, sell high' — against your emotion.
- Once a year (or at a large deviation) is enough; more often costs unnecessary fees and tax.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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