How to rebalance your portfolio in a bull market

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If you’ve chosen a target asset allocation – a mix of stocks, bonds and cash in your portfolio – you’re probably ahead of many investors. But unless you’re investing in a set-and-forget investment option like target-date funds, your portfolio’s asset mix will change as the market fluctuates. In a bull market you may end up with more equity exposure than you planned for, or vice versa if the market falls.

Rebalancing involves selling assets that have appreciated the most and using the proceeds to increase assets that have lagged behind. This brings your portfolio’s asset mix back into balance and enforces the discipline of selling high/buying low. Rebalancing does not necessarily improve your portfolio’s returns, especially if it means selling asset classes that continue to perform well. But it may be a necessary way to prevent your portfolio’s risk profile from growing too high.

Where and how to rebalance

If it’s been some time since your last rebalancing, your portfolio may be heavy on stocks and light on bonds. A portfolio that started out 10 years ago at 60% stocks and 40% bonds may now hold more than 80% stocks.

Another area to examine is the mix of international versus US stocks. International stocks have led the way in 2025, but US stocks have outperformed US stocks for a long time thereafter, so your portfolio may be lacking international exposure. (If you want to keep up with Morningstar’s global markets portfolio, it makes sense to keep about a third of your equity exposure outside the US.)

Other imbalances may exist. Growth stocks have gained almost twice as much as value stocks over the past three years. You may also be overweight due to the recent rally in specific assets like gold and Bitcoin.

After assessing your allocation, decide where to make adjustments. You don’t need to rebalance each account – what matters is the asset mix of the overall portfolio, which determines your risk and return profile. It is usually most tax-efficient to make adjustments to a tax-deferred account, such as IRA Or a 401(k), where trades will not yield real capital gains. For example, if you’re overweight on U.S. stocks and light on international stocks, you can sell U.S. stocks and buy an international-stock fund in your 401(k).

If you need to make changes to a taxable account, you can try to offset any realized capital gains by selling holdings with unrealized losses. This may be difficult, as the strong market environment over the last 12 months has lifted almost every asset type. only a few morningstar Categories (including India Equity, Real Estate, Consumer Defensive and Health Care) posted losses in the 12-month period ending October 30, 2025. The average long-term government-bond fund lost about 8% per year for the last five-year period as of the same date, so they may offer opportunities to harvest losses.

Required minimum distributions can also be used in conjunction with rebalancing. Account owners have flexibility as to which assets to sell to meet the RMD. If you have several different traditional IRAs, you can take the full RMD amount from any of them. Selling the holdings that have appreciated the most can bring the portfolio’s asset mix back in line with your original goals.

Another option is to funnel new contributions into underweight asset classes. Depending on the size of the additional investments, this approach may take time, but it is better than not rebalancing at all. This can also be attractive if you have made capital gains that you do not want to realize.

final thoughts

Rebalancing is especially important in extremely volatile times. But even in a bullish market like in recent years, it is important to keep the risk level of the portfolio under control, especially for investors as they approach retirement and start spending on their portfolio.

This article was provided to The Associated Press by Morningstar. For more personal finance content, visit https://www.morningstar.com/personal-finance

Amy C. Arnott, CFA is a portfolio strategist for Morningstar.