FIRE glossary
Rebalancing
Periodically buying and selling within a portfolio to bring it back to its target asset allocation after markets move it off-target.
Why portfolios drift
Different assets grow at different rates, so a portfolio that starts at, say, 70% equities and 30% bonds doesn't stay there on its own. After a strong run for equities it might quietly become 78/22 - carrying more risk than was originally intended, purely as a side effect of markets moving rather than any deliberate choice. Rebalancing is the periodic act of selling some of what's grown and buying more of what's lagged, to bring the mix back in line with the target set out in your asset allocation. Left undone long enough, drift can turn a moderate portfolio into an aggressive one without anyone having decided to take on more risk.
How it's actually done
Two approaches are common: calendar rebalancing, where you check and correct on a fixed schedule (annually is typical), and threshold rebalancing, where you correct only once an asset class drifts a set number of percentage points off target, whichever comes first. Selling appreciated holdings to buy laggards is the most direct method, but it isn't the only one - routing new contributions and dividends toward whatever's currently underweight gets you back to target gradually, without necessarily selling anything. That distinction matters: a sale inside a taxable account can itself trigger a tax bill, while a contribution-based rebalance, or one done inside a tax-advantaged wrapper, usually doesn't.
What Ember does and doesn't model
Ember's portfolio projection computes a single blended real return from your current asset allocation and holds that allocation constant across the whole projection horizon - it doesn't simulate periodic rebalancing trades, their costs, or their tax consequences year by year. That's a deliberate simplification, not an oversight: modelling actual rebalancing would mean re-weighting the blended return and tracking hypothetical trades every year, which the engine doesn't attempt today. In practice, a plan's projected growth assumes your allocation broadly stays where you set it - let a portfolio drift substantially without correcting it, and the return you actually experience can diverge from what the plan assumed.
Across borders
Whether selling to rebalance counts as a taxable disposal - and at what rate - depends entirely on the country and account wrapper involved: some jurisdictions tax any sale-and-rebuy as a capital gain even when the resulting allocation is unchanged, others let it happen tax-free inside specific wrappers. Move tax residency mid-plan and the rules governing the very next rebalance can flip from one to the other. See how capital gains are treated for each country Ember covers on /countries.
Common questions
How often should I rebalance?
There's no single right schedule. Calendar rebalancing (commonly once a year) and threshold rebalancing (correcting only once an asset class drifts a set number of percentage points off target) are the two standard approaches, and both are reasonable choices. What matters more than the exact cadence is picking one and sticking to it, rather than reacting to market moves as they happen.
Does rebalancing trigger a tax bill?
It can. Selling an appreciated holding to fund the correction is a disposal, and depending on the account wrapper and your tax residency, that disposal can be a taxable event. Routing new contributions and dividends toward whichever asset class is currently underweight achieves the same rebalancing effect gradually, without necessarily selling anything - see /countries for how capital gains are treated where you're resident.
Is rebalancing the same as a glide path?
No. Rebalancing restores a fixed target allocation you've already chosen. A glide path deliberately shifts that target itself over time - typically from growth assets toward capital preservation as retirement approaches. See the glide-path term.
Related terms
See rebalancing in your numbers
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