When markets are quiet, it feels natural to believe in long term investing. You decide on a sensible mix of assets, contribute regularly, and tell yourself that time and compounding will do most of the work. That calm confidence often disappears the moment volatility shows up. Prices swing sharply, headlines turn dramatic, and your portfolio no longer resembles the balanced plan you started with. In that environment, the idea of rebalancing can feel deeply uncomfortable, because it usually asks you to do the opposite of what your emotions are telling you to do. Yet it is precisely during volatile market conditions that rebalancing has the greatest potential to shape your long term performance, not just in terms of returns, but also in terms of risk and your ability to stay invested.
To understand why, it helps to first look at what volatility does to your mindset. Large and sudden market moves place your emotions and your financial plan in direct conflict. When markets fall quickly, fear often appears before anything else. You may feel the urge to stop investing, to move everything to cash, or to avoid opening your account at all. If you follow a rebalancing plan in that moment, you might be required to buy more of the asset that has just fallen in price, such as equities, using money from relatively stable holdings. That feels counterintuitive when everyone around you is talking about losses and uncertainty.
When markets rally, the emotional pattern reverses. Relief and excitement replace fear, and an overweight position in a strong performing sector or region suddenly feels comfortable. You may begin to think that your original allocation was too conservative and that you should let your winners grow unchecked. In that environment, rebalancing often asks you to sell a portion of those recent winners and redirect the proceeds into areas that have not performed as well. This can make you feel like you are leaving the party early or missing out on potential gains.
Neither reaction is irrational from a human perspective. We are wired to avoid pain and chase comfort. The problem is that emotional responses tend to magnify risk at the worst possible moments. In a volatile market, whatever your portfolio is already leaning toward becomes more extreme in a short period of time. A moderate tilt toward equities can quickly turn into a much more aggressive stance after a rally, while a cautious allocation can become even more defensive after a sell off. Rebalancing is one of the few tools an investor has that is specifically designed to counteract this emotional drift and keep the portfolio aligned with its original purpose.
At its core, rebalancing is about restoring your portfolio to the asset allocation you chose at the beginning. When you decided, for example, on a mix of 70 percent equities and 30 percent bonds, you were not picking random numbers. You were choosing a trade off between risk and return that felt suitable for your goals, time horizon, and ability to endure losses. Over time, as markets move, that mix changes. After a prolonged equity rally, a 70 percent allocation to stocks can quietly become 80 or 85 percent, while the bond portion shrinks. The portfolio now behaves like a riskier one, even if you never consciously decided to take more risk.
This gradual drift matters more than many investors realize. A portfolio that becomes more aggressive during good times will also experience deeper declines in the next downturn. That increases the likelihood of panic selling, especially if the investor is close to a major milestone such as retirement or a home purchase. In other words, the danger is not just that markets are volatile, but that your portfolio no longer matches the level of volatility you originally believed you could handle. Rebalancing is the mechanism that brings the portfolio back in line with that original blueprint, so that long term performance reflects your real risk profile instead of an accidental one.
Volatile market conditions make this process both more challenging and more powerful. When prices move sharply, your asset allocation can shift in a matter of days or weeks, not just over years. Ignoring these shifts entirely can leave you with a portfolio that looks nothing like what you intended. At the same time, larger price swings create bigger differences between what has done well and what has lagged. Rebalancing in such an environment means you are often selling assets that have become relatively expensive and buying those that have become relatively cheap, all within the boundaries of your chosen allocation. You are not trying to predict the next turn in the market; you are simply using volatility as a way to implement a disciplined buy low, sell high pattern at the level of asset classes instead of individual stocks.
Over long periods, this discipline tends to influence your outcomes in several ways. First, it helps stabilize risk. By regularly returning to your target allocation, you reduce the chance that a long rally leaves you with an overly aggressive portfolio just before a major correction. Controlling the size of potential losses is crucial for long term performance because of how compounding works. A portfolio that falls 20 percent must gain 25 percent just to break even. A portfolio that falls 40 percent must gain more than 65 percent to recover. When rebalancing helps you avoid extremely deep drawdowns, it indirectly supports better long term results by making it easier to stay invested and give your portfolio time to recover.
Second, rebalancing encourages a repeated pattern of buying assets after they have underperformed and trimming them after they have outperformed. While this does not guarantee higher returns in every period, over several decades it can create a small but meaningful enhancement compared with a portfolio that simply drifts and ends up heavily weighted toward yesterday’s winners. This effect is subtle. You may not notice it in any single year, but it contributes to a smoother, more resilient journey.
Third, and often overlooked, is the emotional benefit. A clear rebalancing plan can reduce the anxiety that comes with market turbulence. When you know ahead of time that you will review your allocation at set intervals, or when it deviates from target by a specific amount, you are less likely to react impulsively to daily headlines. You have a framework that tells you when action is necessary and when it is not. This sense of structure lowers the temptation to abandon your strategy at exactly the wrong moment, which is one of the most destructive behaviors for long term performance.
It is also important to recognize that rebalancing is not a magic formula that always produces the highest possible return. There are scenarios where an investor who never rebalanced would end up with more money at the end of a period. For example, if stocks experience a very strong decade while bonds deliver low returns, a portfolio that allowed equities to grow unchecked from 70 percent to 90 percent or more would show a larger ending value than a portfolio that trimmed equities periodically to maintain the original mix. In retrospect, the disciplined investor may look like they left money on the table.
However, this higher return came with higher risk, whether or not that risk turned into realized losses during the period under review. If a severe downturn occurred just after the measurement period, the more aggressive, unbalanced portfolio would be more exposed to a large loss, which might be unacceptable for an investor close to retirement or another major goal. In that sense, rebalancing is better understood as a tool for aligning outcomes with your real life needs rather than as a technique to maximize returns in every scenario.
Rebalancing also has practical costs. In taxable accounts, selling appreciated assets can trigger capital gains taxes. While trading fees have fallen in many markets, they can still exist, especially for certain products or smaller investors. Rebalancing too frequently, perhaps in response to every minor fluctuation, can therefore create unnecessary friction. This is why many investors choose to rebalance on a set schedule, such as once or twice a year, or when allocations drift beyond a specific band around the target percentages. The goal is to capture the main benefits of rebalancing while keeping costs and taxes at a manageable level.
To see how rebalancing fits into your own situation, you need to reflect on your time horizon, your upcoming financial needs, and your temperament. An investor who has several decades before retirement, who continues to contribute regularly, and who can tolerate large swings without losing sleep may allow wider rebalancing bands. That investor might only act when an asset class is more than, for example, five or ten percentage points away from target. This approach allows the portfolio to benefit from long trends, while still preventing the allocation from becoming completely unrecognizable.
An investor who is approaching retirement or planning to use their investments for education costs, a property purchase, or business capital has a different set of priorities. In that case, the main focus shifts from maximizing growth to preserving purchasing power and reducing the risk of large losses at the wrong time. Narrower rebalancing bands, a slightly higher allocation to defensive assets, and more frequent reviews can all make sense in this context. Rebalancing here is not about squeezing out every last bit of return. It is about making sure that the money will be there, in a roughly predictable range, when it is needed.
Your contribution pattern also influences how you rebalance. If you are still actively adding money to your portfolio, you can often adjust back toward your target allocation by directing new contributions to underweight areas instead of selling existing holdings. This approach can reduce both taxes and transaction costs. Dividend reinvestment and regular top ups become tools for rebalancing gently in the background, so that larger, more disruptive trades are needed less frequently.
Before making changes during a turbulent period, it is wise to pause and ask yourself a few practical questions. Do you still believe in the basic allocation you chose, or has something significant in your life changed, such as your job security, family responsibilities, or retirement timeline. Are you responding to genuine drift in your allocation, or merely reacting to scary or exciting news headlines. Have you explored whether new contributions or redirected dividends could move you closer to your target without the need to sell. Do you have a simple written guideline that describes how often you will review your allocation and under what conditions you will rebalance. Having even a brief one page plan can reduce uncertainty when markets are noisy.
Ultimately, rebalancing during volatile market conditions is less about clever market timing and more about alignment with your goals. Markets will always move in ways that are beyond your control. Volatility is not a problem that can be eliminated; it is a feature of investing in assets that offer the possibility of growth. What you can control is how much risk you choose to take, how you respond when that risk shows up, and whether your portfolio continues to reflect the life you are actually living and the future you are working toward.
A thoughtful rebalancing habit helps you use volatility rather than be overwhelmed by it. When prices fall, you can remind yourself that part of your defensive allocation was chosen precisely so that you would have the capacity to buy more at lower prices. When prices surge, you can see trimming some gains not as missed opportunity, but as a way of protecting the stability of your future spending. Over years and decades, this balance between discipline and flexibility often matters far more than the specific trades you make in any single month.
You do not need to rebalance perfectly or predict the exact peaks and troughs of the market. What you need is a clear sense of the allocation that matches your goals, a reasonable rule for when and how to bring your portfolio back in line with that allocation, and the patience to follow that rule through more than one market cycle. Rebalancing in volatile times does not guarantee the highest possible return, but it can greatly improve the odds that you stay invested, reduce the likelihood of catastrophic losses, and reach your long term goals with more confidence and less emotional strain.
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