You picked 80% stocks, 20% bonds. Stocks rally, and suddenly you're sitting at 90/10 without lifting a finger. Rebalancing closes that gap by trimming some stocks and topping up bonds. It is mechanical, it takes ten minutes a year, and it stops you from carrying more risk than you ever agreed to.
Ten years of a bull market quietly turn an 80/20 into a 95/5. The balance sheet looks great, but the portfolio is now running far more risk than you ever signed up for. When the next drawdown arrives, the hit will be roughly twice as deep. Rebalancing prevents that silent drift: it trims what has surged, refills what has lagged, and stops there.
Two methods dominate. Pick the one you can actually stick to: the best strategy is the one you will keep applying.
Once a year, say on January 1, you bring the portfolio back to target. Advantage: no decision to make, a calendar reminder is enough. Limit: if nothing has drifted, you pay fees for nothing; if a big move hits in July, you wait six months before reacting.
You set a tolerance band, say ±5 points. As long as the 80/20 stays between 75/25 and 85/15, you do nothing. As soon as one class steps outside the band, you rebalance. Advantage: you act when it matters, not before. Limit: you need to check allocation monthly or set up a broker alert.
Between February 19 and March 23, 2020, the S&P 500 dropped 34%. The 80/20 had just slipped to 70/30. If you applied the rule, you sold a portion of your bonds to buy stocks at the bottom. Twelve months later, the index had recovered about 75%. Bonds cost you a little return before the crash. They paid for the shares you bought while everyone else was panicking.
Letting it ride means letting the market choose your allocation for you. After five years of tech-stock gains, your "balanced" portfolio has become a concentrated bet on a single sector. When that sector corrects, you discover the risk you were carrying without knowing it.
For a FIRE plan, keep the rule simple: one check a year and a ±5% band. If nothing has drifted, you leave everything alone. If a class steps outside the band, you rebalance. And while you are still saving, do it without selling: direct this month's savings into the asset class that has fallen below target. No tax friction, no transaction fees.