What your asset allocation actually decides
Asset allocation is the split of your portfolio across broad categories — stocks, bonds, property, cash. It gets more attention than fund selection for a simple reason: the split does most of the work. Which specific index fund you hold matters far less to your outcome than whether you are 40% or 80% in equities.
The uncomfortable part is that the split will not stay where you put it. Nobody has to do anything wrong for a portfolio to drift. Whichever asset grows fastest becomes a larger share of the total simply by growing, and after a strong run in one category a portfolio built as 60% stocks can be sitting at 72% without a single trade having been made.
That drift is not a rounding problem. It means the risk you are carrying is no longer the risk you chose, and you usually find out during the next fall rather than before it.
How rebalancing works, and the arithmetic behind the trades
The mechanics are less complicated than the language around them suggests. Four steps:
- Add up everything to get the portfolio total.
- Work out each asset's target value: target percentage × total.
- Compare: target value − current value. Positive means buy that much, negative means sell it.
- Check the drift against your band and decide whether it is worth acting at all.
Take $8,000 in stocks and $3,600 in bonds against a 60/40 target. The total is $11,600, so stocks should be $6,960 and bonds $4,640. Stocks are $1,040 over, bonds are $1,040 under: sell $1,040 of stocks, buy $1,040 of bonds. The two figures match because rebalancing moves money around inside the portfolio without changing its size.
That equality is worth remembering as a sanity check. If your buys and sells do not cancel out, your target percentages do not add to 100%, and the calculator will tell you so.
Percentage points, not percent — the measure that trips people up
Almost every rebalancing guide says something like "act at 5%". That sentence has two readings, and they give different answers.
An absolute band measured in percentage points is the common retail rule: a 45% target is left alone between 40% and 50%. A relative band is a percentage of the target weight, and several institutional managers use plus or minus 25% at the sub-asset level: a 10% target is then left alone between 7.5% and 12.5%.
On a large holding the two are similar. On a small one they diverge sharply. A 5% cash target under an absolute 5-point band would tolerate anything from 0% to 10% — meaning cash could vanish entirely without triggering anything. Under a relative 25% band the same holding is policed between 3.75% and 6.25%.
This calculator uses percentage points, the absolute reading, because it is the one retail guidance overwhelmingly means. If your holdings are lopsided in size, be aware that a single absolute band is generous to your small positions and strict on your large ones.
What to put in each field
Value now. What each category is worth today, across every account. Rebalancing works on the whole portfolio, so a 401(k), an IRA and a taxable brokerage account should be added together rather than balanced separately — otherwise you will trade in a taxable account to fix something you could have fixed for free elsewhere.
Target. The share you want each category to be. These must add to 100%; the running total under the rows tells you where you stand, and turns red if it does not add up.
Drift band. How far you will let something wander before acting. Five percentage points is the usual default. A tighter band means more trades and more cost; a wider one means more drift. Setting it to 0 shows every trade needed for an exact rebalance, which is useful for seeing the full picture even if you would not act on all of it.
New money to add. On the contribution tab, whatever you are about to invest. The targets are calculated on the total after that money lands, which is what makes the resulting plan actually correct rather than approximately right.
Drift bands versus rebalancing on a schedule
Two approaches, both defensible.
Calendar rebalancing means checking on a fixed date — every January, or each birthday — and correcting whatever has moved. Its strength is that it is a habit rather than a judgement, and habits survive market panics better than judgements do. Its weakness is that it can miss a large move that happens and partly reverses between checks.
Band rebalancing means acting whenever drift exceeds your threshold, whenever that happens. It responds faster to genuine dislocations, at the cost of requiring you to actually look, and of clustering trades into exactly the volatile periods when acting feels hardest.
Most people end up somewhere between: check on a schedule, act only if a band has been breached. That gives you a fixed habit and a filter against pointless small trades, which is the useful half of each approach.
Rebalancing with new money instead of selling
If you are still contributing, the cheapest correction is usually to buy rather than to sell. Selling an appreciated holding in a taxable account realises a gain and a tax bill; directing your next contribution to whatever is underweight achieves part of the same correction at no tax cost at all.
The contribution tab works out how far that gets you. It calculates each target against the post-contribution total, finds which assets are underweight, and splits your contribution across them in proportion to how far short each one is. If the contribution covers every shortfall you land exactly on target with no selling. If it does not, you get the partial plan and a plain statement of how much overweight position is still left over.
The honest limitation: once drift is large, contributions cannot fix it alone. A portfolio 12 points overweight in equities is not coming back with one month's savings, and at some point the choice is between selling and accepting the drift for a while. Inside a tax-sheltered account this whole dilemma disappears, since selling there costs nothing but the spread.
Where the model allocations come from, and what they cannot know
The risk profiles on the model tab use the stock and bond split Vanguard publishes as commonly used: aggressive 80/20, moderate 60/40, conservative 40/60, with two intermediate steps and a small cash sleeve carved out of the fixed-income side. They are a widely recognised reference point, not a recommendation for you.
The age-based rules subtract your age from 100, 110 or 120 to get a stock percentage. It is worth seeing all three side by side, because at 40 they produce 60%, 70% and 80% stocks — a twenty-point spread from one input, which tells you how much precision to read into any of them.
What none of these can see: whether your income is stable, whether you have a cash buffer elsewhere, how many years until you need the money, whether you have debt costing more than any portfolio will return, and how you actually behaved the last time your holdings fell by a third. That last one is the most predictive and the least quantifiable. A model portfolio you abandon in a crash is worse than a cautious one you keep.
What this calculator does not cover
- Tax. No capital gains calculation, no distinction between accounts. A sell instruction here may be free in a 401(k) and expensive in a taxable account, and this page cannot tell which.
- Trading costs. Spreads, commissions and minimum investment sizes are ignored, so very small suggested trades may not be worth executing.
- What is inside each category. Two portfolios can both read 60% stocks while holding completely different risk. Category-level allocation is the first cut, not the whole picture.
- Wash sale and settlement rules. Selling and rebuying similar holdings carries rules this page knows nothing about.
- Whether your target is right. It calculates the trades that reach your target. Whether that target suits you is the part no calculator can answer.
Frequently asked questions
How often should I rebalance my portfolio?
Most guidance lands on checking once or twice a year and only trading when something has actually drifted meaningfully. Checking more often rarely helps, because the point of rebalancing is to control risk rather than to time anything, and every extra trade costs spread, commission or tax. The two workable approaches are a fixed schedule, such as every January, or a drift band that you act on whenever it is breached. Picking one and sticking to it matters more than which one you pick.
What is the 5% rule for rebalancing?
It means acting when an asset class sits more than five percentage points away from its target: a 60% stock target would be left alone at 63% and rebalanced at 66%. The band exists so that small, self-correcting moves do not generate trades while genuine changes in risk still get caught. Note that some firms apply a relative band instead, such as plus or minus 25% of the target weight, which for a 10% holding means acting outside 7.5% to 12.5%. The two rules give very different answers on small holdings, so it is worth knowing which one you are using.
Should I rebalance by selling or by adding new money?
Directing new contributions to whatever is underweight is usually the cheaper route, because it corrects the drift without realising any gains. In a taxable account that difference can be substantial. The limitation is size: once a position has drifted a long way, a single contribution will not close the gap, and you either accept partial correction over several months or sell. Inside a tax-advantaged account like a 401(k) or an IRA, selling costs nothing in tax, so the distinction matters much less.
Does my target allocation have to add up to 100%?
Yes, and the calculator warns you when it does not. Target percentages are shares of one portfolio, so anything other than 100% means the target dollar figures do not describe a portfolio you could actually hold. Totals slightly under 100% are usually a rounding artefact from splitting an odd number of holdings; totals well over it usually mean an asset was entered twice or a percentage was typed as a dollar figure.
What allocation should someone my age have?
Age-based rules of thumb subtract your age from a fixed number to get a stock percentage, with 100, 110 and 120 all in common use. At 40 those give 60%, 70% and 80% stocks respectively, which is a wide spread from the same input and shows how rough the rule is. Age is a proxy for time horizon, and it is only one of the things that should drive the decision. Job security, whether you have other income, how much you already hold and how you actually behaved the last time markets fell all matter, and none of them is in the formula.
Does rebalancing improve returns?
Not reliably, and that is not really its purpose. Because it trims whatever has risen most, rebalancing tends to reduce returns slightly in a long one-directional bull run and help in choppy or mean-reverting markets. What it does dependably is hold your risk near the level you chose, which is the argument for it. A portfolio that drifts from 60% to 80% stocks over a decade has quietly become a different portfolio, and usually discovers this at the worst possible moment.
These results are estimates for general information only and are not investment advice. Model allocations and age-based rules are widely cited starting points, not recommendations for any individual. Figures exclude tax, trading costs and account-type differences, and selling assets may create a tax liability depending on where they are held. Confirm any figure against your own account statements, and speak to a qualified financial adviser before making investment decisions.