How to Rebalance Your Portfolio in a Lofty Market

Market Shifts Necessitate Portfolio Rebalancing, Experts Say

Investors who set target asset allocations for their portfolios may find their carefully designed investment plans gradually drifting off course as markets fluctuate. Financial experts warn that the recent bull market has likely pushed many portfolios toward higher equity exposure than originally intended, potentially increasing risk beyond investors’ comfort levels.

Rebalancing—the practice of selling appreciated assets and reinvesting in underperforming ones—has become increasingly important as market gains continue to reshape investment portfolios. This strategy helps maintain a portfolio’s intended risk profile while enforcing the investment discipline of selling high and buying low.

“A portfolio that started with 60% stocks and 40% bonds a decade ago could now hold more than 80% stocks if left untouched,” notes Amy C. Arnott, CFA and portfolio strategist for Morningstar. “This dramatic shift significantly increases the portfolio’s overall risk exposure, which could prove problematic during market downturns.”

The shift isn’t limited to the stock-bond balance. International stock allocations may have declined relative to U.S. holdings during the extended period of U.S. market outperformance, though international markets have shown stronger performance in 2025. Financial advisors typically recommend keeping approximately one-third of equity exposure in international markets to maintain alignment with global market representation.

Other imbalances may have emerged as certain sectors outperformed others. Growth stocks have gained nearly twice as much as value stocks over the past three years, potentially creating overconcentration in growth-oriented investments. Specialized assets like gold and bitcoin, which have experienced significant price appreciation recently, may also represent a larger portion of portfolios than initially intended.

When implementing rebalancing strategies, investors should focus on the overall portfolio’s asset mix rather than balancing each individual account. For tax efficiency, experts recommend making adjustments primarily within tax-deferred accounts such as IRAs or 401(k)s, where trades won’t trigger capital gains taxes.

“If you’re overweight on U.S. stocks and underweight on international stocks, you could sell some U.S. stock funds and purchase international stock funds within your retirement accounts without tax consequences,” Arnott explains.

For taxable accounts, investors might offset potential capital gains by simultaneously selling investments with unrealized losses—though this strategy may prove challenging in the current market environment. As of October 30, 2025, only a few investment categories showed losses over the previous 12 months, including India equity, real estate, consumer defensive, and healthcare sectors. Long-term government bonds, which lost approximately 8% annually over the past five years, might offer opportunities for tax-loss harvesting.

Required minimum distributions (RMDs) from retirement accounts present another rebalancing opportunity. Account owners have flexibility in choosing which assets to sell when taking these mandatory withdrawals. By strategically selling overweight positions to satisfy RMDs, investors can simultaneously fulfill IRS requirements and realign their portfolios.

For those reluctant to sell existing investments, particularly those with significant unrealized gains, directing new contributions toward underweight asset classes offers a gradual approach to rebalancing. While this method takes longer to achieve target allocations, it avoids immediate tax consequences and keeps the portfolio moving toward its intended structure.

Financial experts emphasize that rebalancing becomes particularly crucial during periods of extreme market volatility. However, even during more modest bull markets like the current environment, maintaining proper asset allocation helps manage risk—especially for investors approaching retirement who will soon begin drawing from their portfolios.

“Rebalancing may not always maximize short-term returns, particularly when it means selling high-performing assets,” Arnott cautions. “But its true value lies in risk management, helping ensure your portfolio doesn’t become more aggressive than you intended as markets change.”