As we enter the final quarter of 2025, many investors are pondering the same question: is it time to rebalance your investment portfolio now, or should you wait a little longer? The short answer is: it might be a good idea, especially if your financial situation or risk tolerance has changed. However, the more detailed answer depends on market trends, the economic environment, and the specifics of your investment portfolio.
In this article, we will analyze the current economic situation to help you address this question. Additionally, we will discuss why and when rebalancing could be reasonable and provide you with a practical, tactical approach to rebalancing your investments in 2026.
To make informed decisions, investors must understand the macroeconomic environment. Currently, several key factors are influencing the market:
As part of its accommodative cycle, the Federal Reserve has started easing monetary policy. In mid-September, the Fed lowered the federal funds rate to 4.00%–4.25% and signaled potential further rate cuts in the future. Generally, lower rates boost corporate profits and reduce borrowing costs, which typically drive up risk assets like stocks.
However, this also compresses future returns on fixed-income investments, lowering bond yield levels. With monetary policy shifting from tightening to easing, investors should closely monitor this crucial turning point.
Although inflation has eased from its peak, it remains above the Fed’s long-term target. In August 2025, the Consumer Price Index (CPI) showed an overall inflation rate of 2.9%, while the core inflation index, which excludes volatile items like food and energy, was even higher.
In other words, while price pressures are easing, they have not completely disappeared. Faced with this mixed outlook, cautious optimism should be maintained rather than complacency. When investing in fixed-income assets, investors should be aware that inflation erodes purchasing power and impacts returns.
Since the beginning of 2025, the S&P 500 index has delivered double-digit returns. Notably, the year-over-year profit growth for the S&P 500 in the third quarter of 2025 is expected to be 7.7%. If this growth rate can be sustained, the index will achieve nine consecutive quarters of profit growth.
What is driving this rally? Corporate earnings remain resilient, and the Fed’s monetary policy is becoming more accommodative.
However, some strategists caution that future returns may become unbalanced, and an economic downturn could emerge in 2026. Given the differing market outlooks, defensive and growth stocks could both find favor in the market.
With rising earnings expectations for companies and potential future rate cuts by the Fed, major banks and investment firms are raising their target levels for the S&P 500 index. For instance, Goldman Sachs recently increased its target value for the S&P 500, reflecting a dovish stance from central banks. However, some institutions warn of potential economic slowdown. Over the next few months, due to the lack of a unified consensus, market uncertainty and volatility may increase.
Overall, the current environment is characterized by lower interest rates, ongoing inflation, and steady corporate profits, favoring further market uptrends. Although this process may be filled with uncertainty and volatility, different industries may lead at different times. When implementing a rebalancing strategy, these subtle differences should be taken into account.
Rebalancing is not just a necessary technical operation but also a strategic decision to manage risk and maintain portfolio consistency. If you are still indecisive, here are three compelling reasons to consider:
If stocks have outperformed bonds in the past year, the proportion of stocks in your portfolio may have exceeded your initial plan. For instance, a portfolio originally allocated as 60% stocks/40% bonds may now have shifted to 68% stocks/32% bonds. In other words, you are taking on more risk than initially anticipated. By rebalancing back to the target allocation, you will be forced to practice “selling high and buying low,” a core principle of successful investing.
The ultimate goal is to reduce exposure to outstanding assets and increase exposure to underperforming assets, achieving locked-in gains while positioning for future growth.
Rebalancing assets after a significant market rally allows for profit-taking and seizes opportunities for future growth. By reinvesting some profits, you can lower overall risk exposure through allocating to high-quality bonds, cash, and undervalued industries.
This proactive strategy minimizes the impact of abrupt market downturns, allowing the portfolio to continuously participate in market rebounds.
From the sharp rise in inflation to significant Fed rate hikes, the economic environment has undergone drastic changes in recent years. Some of the assumptions on which you based your target asset allocation, such as expected returns, volatility, and correlations between different asset classes, may no longer apply.
Through portfolio rebalancing, you can evaluate long-term planning, adjust assumptions, and ensure that your portfolio continues to align with your financial goals, risk tolerance, and investment timeline.
Developing a set rebalancing strategy is key to success. To make this process easier, here is a step-by-step guide:
Before making any trades, review your target asset allocation (e.g., 60% stocks/40% bonds). Consider the following questions:
• Have my financial goals changed? For example, is retirement approaching?
• Is my investment timeline getting shorter or longer?
• Has my risk tolerance changed? Does market volatility make me more uneasy?
If any of the above factors have changed, you may need to adjust your target allocation. Aligning your rebalancing actions with your overall financial planning is crucial as the first step.
Consider dividing your investment portfolio into three categories:
• Core holdings (buy and hold): These are broad market ETFs and index funds that you hold long term, forming the bulk of your portfolio. Regular rebalancing is required to maintain the target allocation.
• Tactical allocations (opportunistic): Allocate a smaller portion (5%–15%) of your portfolio to specific industries, international markets, or undervalued small-cap stocks selectively without disrupting the overall strategy.
• Defensive allocations (risk control): This includes assets like cash, short-term bonds, or Treasury Inflation-Protected Securities (TIPS). Holding defensive assets during an economic slowdown provides liquidity and mitigates volatility risk.
If stocks have risen by 15%–20% from the beginning of the year, and your stock allocation exceeds the target by more than 10 percentage points, you can reduce risk by purchasing short-term bonds or cash equivalents. If your allocation to international markets or value stocks is underweight and these assets are underperforming, consider gradually rebalancing (dollar-cost averaging over 3–6 months).
For retirement accounts, consider avoiding taxable events by internally transferring within the account or directing new contributions to underrepresented parts to avoid triggering taxes.
Tax considerations are crucial when dealing with taxable brokerage accounts.
• Prioritize tax-advantaged accounts: 401(k) or traditional individual retirement accounts (IRAs) allow you to adjust asset allocations within the account, making rebalancing tax-free and straightforward.
• Implement tax-loss harvesting: Selling assets with losses in a taxable account to offset capital gains is known as tax-loss harvesting. Such transactions help rebalance the investment portfolio.
• Avoid unnecessarily realizing gains: Be mindful of your future tax rate brackets when triggering significant capital gains, particularly if you expect to remain in the same or lower tax brackets.
While bond prices may still have room to rise after the Fed rate cut, current yields remain attractive compared to the past few years.
• Short to medium-term bonds: These allocations provide relatively balanced income streams while being less sensitive to interest rate changes.
• TIPS (Treasury Inflation-Protected Securities) or high-quality corporate bonds: If you still worry about persistent inflation, consider increasing holdings in TIPS for protection. High-quality corporate bonds offer higher yields than government bonds and come with relatively controlled risks.
During an economic slowdown, defensive sectors such as healthcare and consumer staples provide support; while cyclicals like finance and industrials benefit in times of accelerated growth.
In an environment where inflation remains sticky but rates are falling, a tilt towards value and quality factor strategies can help reduce volatility compared to momentum-driven exposure.
Overall, rebalancing is a sound practice, but in some situations, it may be advisable to hold off:
• in the asset accumulation stage: Instead of selling well-performing assets in taxable accounts and triggering taxes, young investors may gradually adjust their portfolios by incrementally increasing investments.
• When trading costs are high: Small-scale accounts or illiquid assets may incur high trading costs with frequent rebalancing.
Regardless of market fluctuations, several timeless rules can guide your rebalancing decisions:
• Set a schedule and thresholds: Avoid rebalancing on impulse and adhere to a fixed schedule (e.g., quarterly or semi-annually) and specific thresholds (e.g., when an asset class deviates more than 5 percentage points from the target).
• Rebalancing is not market-timing: The essence is risk management, not predicting the next market trend.
• Maintain some cash buffer: Holding a small amount of cash (2%–5% of the portfolio) allows seizing opportunities during market pullbacks without hastily liquidating other assets.
• Document your decision-making rationale: Writing down the reasons for rebalancing helps avoid questioning your judgments afterward.
Is it time to rebalance now? For most investors, the well-considered answer is affirmative. In the backdrop of significant stock gains and changing monetary policy environment, rebalancing is a prudent risk management measure. By rebalancing your portfolio, considering tax implications, and allocating to bonds and cash to reduce volatility, you’ll be prepared to tackle the uncertainties of 2026.
This is not about timing the market but about aligning your portfolio with your long-term objectives and risk tolerance. It’s not gambling; it’s insurance.
This article was originally published on the Due Blog website and authorized for reprint by the English version of the Epoch Times: “Is Now the Time to Rebalance Your Portfolio? Market Outlook Heading Into 2026”.
The views and opinions expressed in this article are solely those of the author and are provided for general informational purposes only, without any intent for recommendation or solicitation. The Epoch Times does not offer investment, tax, legal, financial planning, real estate planning, or other personal financial advice. The Epoch Times does not guarantee the accuracy or timeliness of the article’s content.