Published: Wednesday, April 1, 2026 Series: The Blueprint | Practical Investing Guides
Marcus logs into his 401(k) portal on a Sunday afternoon. He hasn't checked it in about 18 months; not because he's been negligent, but because he did his homework. Two years ago, he read everything he could find, settled on a 70/30 allocation (70% stocks, 30% bonds), picked two index funds, and set it up properly. He was done. He had a plan.
He looks at the current breakdown.
81% stocks. 19% bonds.
He didn't touch anything. He didn't make a single trade. But his portfolio is now carrying 11 percentage points more risk than he chose to carry. And the only reason he's finding out today is that he happened to log in.
What just happened to Marcus's portfolio
Markets don't move in lockstep. Stocks and bonds go up and down at different rates and in different directions. When stocks have a strong run, they grow faster than the bond side of a portfolio, and the ratio shifts. Silently, without any notification, without any action required from you.
This is called drift: the gradual divergence between your target allocation and your actual allocation, driven entirely by the different returns of each asset class.
No alert fires. No email arrives. The portal doesn't flag it. It just happens, steadily, every year the market runs in one direction.
A 70/30 portfolio after a strong bull market becomes 75/25. Then 78/22. Then 82/18. And most investors never notice, because checking the exact ratio isn't something they thought to put on the calendar.
Why this matters more than it sounds
In Issue #1, we established that your allocation (the ratio of stocks to bonds) is the single decision that explains 91.5% of your long-term returns. It's also the primary lever that sets your risk level. A 70/30 portfolio behaves very differently from an 82/18 portfolio in a down market.
When you chose 70/30, you were saying: "I can handle a significant stock decline, but I want 30% of my portfolio in bonds as a cushion." Drift erodes that cushion without asking you.
Here's what that looks like with real numbers.
A 60/40 portfolio in January 2019. The 2019-2021 bull run was one of the strongest in recent memory. By January 2022, a 60/40 portfolio that was never rebalanced had drifted to approximately 75/25. The math: if you started with $300,000 at 60/40, that's $180,000 in stocks and $120,000 in bonds. By early 2022, that same portfolio (no new contributions, no changes) was roughly $225,000 in stocks and $75,000 in bonds.
Then 2022 happened. The S&P 500 fell approximately 19% that year.
The investor with the target allocation (60/40) took the hit on $180,000 of stock exposure. The investor with the drifted portfolio (75/25) took the same percentage hit on $225,000 of stock exposure. That's a difference of roughly $8,550 in losses, not from a wrong decision, but from no decision at all.
And this wasn't a one-year anomaly. That money doesn't come back immediately. It compounds differently from that point forward.
The sequence-of-returns problem (from Issue #1) makes drift especially dangerous in your 50s. The closer you are to retirement, the more a large down year costs you, not just in dollars, but in the recovery time you no longer have. If your allocation has drifted toward more stocks just before a correction, you've accidentally taken on the exact risk your target allocation was designed to limit.
What rebalancing is and what it isn't
Rebalancing is the act of selling the asset class that has grown above its target and using the proceeds to buy the asset class that has fallen below target, restoring your original ratios.
If your target is 70/30 and you're currently at 82/18, you sell some of the stock funds and buy more of the bond fund until you're back at 70/30.
That's it. That's the whole operation.
Here's the framing that matters: rebalancing is not market timing. It's the opposite.
Market timing is making predictions: "Stocks are about to fall, so I'll move to bonds now." That requires being right about the future. Virtually no one is, consistently.
Rebalancing makes no prediction at all. You're not saying stocks will fall. You're saying: "My target is 70/30. I'm currently at 82/18. I need to be at 70/30. So I sell some stocks and buy some bonds." The reason you're selling stocks isn't that you think they'll drop; it's that they've already risen enough to push you off your target. The action is mechanical, not predictive.
This distinction matters because a lot of people resist rebalancing with: "But why would I sell the thing that's been doing well?" The answer is that you're not selling it because it's about to stop doing well. You're selling it because it's now a larger share of your portfolio than you decided you wanted to hold.
The threshold rule: Small drift is noise. You don't need to rebalance every time the ratio shifts by 1%. The standard practice is to rebalance when any asset class has drifted more than 5 percentage points from its target. So if your target is 70/30, you rebalance when you reach 75/25 or 65/35. Within that band, leave it alone.
How to actually do it
The mechanics are straightforward. Here's the full sequence:
Step 1. Log in to your 401(k) or IRA and find your current allocation. Most portals show this as a percentage breakdown or a pie chart in the "Holdings" or "Asset Allocation" section.
Step 2. Compare it to your target. If you haven't written your target down, this is a good moment to do that. It should come from the work you did in Issue #1: the allocation you set based on your age, timeline, and risk tolerance.
Step 3. If you've drifted more than 5 percentage points in either direction, it's time to rebalance.
Step 4. Sell the overweight asset class, buy the underweight one, until you're back at your target ratios.
Important note on taxes:
In a 401(k) or IRA, there are no tax consequences for rebalancing. These are tax-advantaged accounts; you can buy and sell freely inside them without triggering a taxable event. Do this as often as you need to.
In a taxable brokerage account, selling an asset that has gained in value creates a capital gains tax event. To avoid this, you have a cleaner option: instead of selling the winner, direct your new contributions to the underweight asset class until the ratio comes back in line. If you're still adding money to the account regularly, this works without triggering any taxes.
If you're still making contributions: New money is a free rebalancing tool. When you contribute to your 401(k), you choose which funds that contribution goes into. If stocks are overweight, direct your next several contributions entirely to the bond fund. No selling required.
How often
Annual is the right cadence for most people. Research on rebalancing frequency consistently shows that the difference between quarterly and annual rebalancing in long-term outcomes is negligible; but the difference in time and effort is not.
Once a year. Same week every year. That's the system.
Pick an anchor that you'll actually remember: - First week of January (easy: you're already doing year-end review) - Your birthday - The anniversary of when you first set up the account
The specific week doesn't matter. The consistency does. A check-in that you do every year catches drift before it becomes a problem. A check-in that you get around to eventually catches drift after it's already cost you.
The one action
Log in to your 401(k) or IRA today. Find your current allocation. Compare it to the target you set in Issue #1.
If it's drifted more than 5 percentage points in either direction, make a note to rebalance this month. You now know how.
Then open your calendar and set a recurring annual reminder for the same week every year. Title it something specific: "Rebalance 401(k): check allocation against target." Give it 30 minutes. That's the whole maintenance schedule for your portfolio.
You never have to wonder if your risk level is still what you chose. You check it once a year and, if needed, correct it. That's the system.
Next week: You've been paying a fee on every dollar in your portfolio, probably without knowing it. Next issue covers the number that's quietly costing most 401(k) investors $80,000 or more, and where to find yours in under two minutes.
The Blueprint is a Wednesday series covering the fundamentals of long-term investing: one concept at a time, in plain language, with real numbers.