If I had to pick one investing habit that best represents my overall investment philosophy, it would probably be rebalancing.

Not because it's exciting. Quite the opposite. It's boring, predictable, and almost entirely mechanical. It doesn't require you to forecast the economy, predict interest rates, or figure out which stock will be the next Nvidia. Instead, it requires just a small dose of discipline. And in my experience, this small dose of discipline beats brilliance when it comes to long-term investing.

When physicians ask me how to become better investors, they're often expecting to hear about stock picks or market timing. Instead, we usually end up talking about index funds, asset allocation, and rebalancing. Those topics may not generate headlines, but they've quietly built far more wealth for investors than chasing the latest investment fad.

The beauty of the simple investing habit of rebalancing is that it allows you to consistently buy low and sell high without ever needing to know what the market is going to do next. That's an incredibly powerful concept, especially for busy physicians.

Asset Allocation Comes First

Before you can rebalance anything, you need an investment plan.

That starts with determining your ideal asset allocation. Asset allocation simply refers to how your investments are divided among different asset classes such as stocks, bonds, and real estate. I've written before that this is one of the single most important investing decisions you'll ever make because it largely determines both your expected returns and the amount of risk you'll experience over time.

Your allocation might be something like:

• 80% stock index funds
• 10% bond index funds
• 10% REIT funds (essentially real estate index funds)

Or perhaps you prefer something even simpler:

• 90% Total Stock Market Index Fund
• 10% Total Bond Market Index Fund

There isn't one perfect allocation that fits everyone. What matters most is choosing an allocation that matches your goals and risk tolerance, writing it down, and committing to sticking with it for decades rather than changing it every time the market makes you nervous.

Markets Never Stay Balanced

Here's where things get interesting.

Once you've invested according to your target allocation, the market immediately begins changing it.

Some years stocks have phenomenal returns. Other years bonds outperform. And other times, real estate takes the lead. Because every asset class grows at a different rate, your portfolio slowly drifts away from the percentages you originally intended.

Suppose you began the year with this allocation:

Asset	Target Allocation
Stocks	80%
Bonds	10%
REITs	10%

Now imagine stocks have an incredible year while bonds and REITs struggle. By year's end your portfolio may actually look like this:

Asset	Actual Allocation
Stocks	90%
Bonds	5%
REITs	5%

Notice what happened. Without making a single investment decision, you've become much more aggressive than you originally intended. You're now taking more stock market risk than fits the financial plan you carefully developed.

That's exactly what rebalancing is designed to fix.

What Rebalancing Actually Means

Rebalancing as an investing habit simply means returning your investments to your predetermined asset allocation.

In our example, you would move from:

• 90% Stocks
• 5% Bonds
• 5% REITs

back to your original goal of:

• 80% Stocks
• 10% Bonds
• 10% REITs

That's all there is to it. You're not trying to predict whether stocks will continue rising or whether bonds are finally due for a comeback. You're simply following the written investment plan that you created before emotions entered the picture.

I love this approach because it removes the need to guess what happens next. The future is unknowable. Your investment strategy doesn't have to be.

Why Rebalancing Forces You to Buy Low and Sell High

Everyone knows the old investing saying: buy low and sell high.

Almost nobody consistently follows it.

When stocks are soaring, investors naturally want to buy more because optimism is everywhere. When markets crash, fear takes over and many investors sell after prices have already fallen. Human nature pushes us toward buying high and selling low. Time and again has shown that you just can't catch a falling knife in the stock market…

Rebalancing flips that instinct upside down.

If stocks have significantly outperformed everything else in your portfolio, you'll sell a portion of those appreciated investments and use the proceeds to purchase whichever asset classes have lagged behind. You're selling assets that have become relatively expensive while buying assets that have become relatively inexpensive.

Without trying to predict the market, you've accomplished exactly what every investor claims they want to do: Buy low. Sell high.

And because you're following predetermined rules rather than emotions, you're much more likely to actually do it.

Two Simple Ways to Rebalance

There are actually two different methods to rebalance a portfolio, and both can work extremely well.

Method 1: Buy and Sell Existing Investments

The traditional approach is exactly what most people picture.

Suppose your portfolio has drifted to 90% stocks, 5% bonds, and 5% REITs. You simply sell enough of your stock index fund to reduce it back to 80% and then use those proceeds to purchase bond funds and REIT funds until they each return to 10%.

Inside tax-advantaged retirement accounts like a 401(k), 403(b), 457(b), IRA, or HSA, this generally has no tax consequences because trades within the account aren't taxable events.

However, if you're investing in a taxable brokerage account, selling appreciated investments could generate capital gains taxes. That's one reason I often prefer the second method whenever it's practical.

Method 2: Use New Contributions

This is actually how I typically recommend physicians rebalance their portfolios whenever possible.

Instead of selling investments, simply direct your new contributions toward whichever asset classes have become underrepresented.

Imagine your portfolio has drifted to:

• 85% Stocks
• 10% Bonds
• 5% REITs

Rather than selling any stocks, your next several investments might go entirely into your REIT fund until the allocation naturally returns to your target percentages. Likewise, if bonds have lagged, your next contributions can simply be directed toward your bond fund.

This approach accomplishes the exact same goal while often avoiding capital gains taxes entirely. It also has the psychological advantage of feeling less like you're taking money away from your best-performing investments and more like you're simply adding to the investments that currently offer better relative value.

How Often Should You Rebalance?

One mistake I see investors make is assuming they need to constantly monitor and adjust their portfolios. You don't. In fact, excessive rebalancing often creates unnecessary work without improving long-term results.

For most investors, checking your portfolio once or twice each year is more than sufficient. Some investors also use threshold-based rebalancing, meaning they only make changes once an asset class drifts five percentage points or more away from its target allocation.

Personally, I prefer keeping things simple. Pick one or two dates every year, review your portfolio, rebalance if necessary, and then move on with your life.

If you'd like a deeper discussion about timing, I've covered it in detail in When Should Doctors Rebalance Their Investment Portfolio?.

Why This Fits Perfectly With Passive Investing

Everything I've written over the years ultimately comes back to one simple philosophy: investing should be boring.

That's why I'm such a strong advocate of low-cost index fund investing. Rather than trying to identify tomorrow's winning stocks, I'd much rather own the entire market through broadly diversified index funds and spend my time taking care of patients, coaching baseball, and being with my family.

Rebalancing fits seamlessly into that philosophy because it removes the temptation to make emotional decisions. You're not chasing performance or reacting to headlines. You're simply maintaining the risk profile you intentionally selected years earlier.

This philosophy also happens to be supported by an overwhelming amount of evidence.

Research has repeatedly shown that the vast majority of actively managed funds fail to outperform comparable index funds over long periods after accounting for fees. The latest SPIVA (S&P Indices Versus Active) Scorecards continue to demonstrate that most active U.S. equity managers underperform their benchmarks over 10-, 15-, and 20-year periods. Likewise, the landmark SPIVA Persistence Scorecard has shown that managers who outperform over one period rarely continue outperforming in subsequent periods.

That reality is one of the biggest reasons I don't spend my time trying to find the next investing genius. Instead, I focus on controlling the variables that actually matter.

Those include:

• Maintaining a high savings rate
• Investing consistently
• Keeping investment expenses low
• Maintaining an appropriate asset allocation
• Rebalancing periodically
• Ignoring market noise

Those are decisions we actually control. Market returns aren't.

Research from both Vanguard and Fidelity also supports periodic rebalancing as a disciplined way to maintain your desired risk profile over long investment horizons.

Investing Should Feel Almost Boring

One of my favorite signs that someone has built a great investment plan is that they don't have much to talk about when it comes to investing.

They're automatically contributing to retirement accounts every month. They're buying diversified index funds. Once or twice each year they glance at their asset allocation, make a few small adjustments if necessary, and then go back to living their lives.

That may sound boring.

Good.

I've written before about why boring index funds are often the most effective wealth-building tool available. Investing should quietly happen in the background while you're focused on your career, your family, and the life you're trying to build. It isn't supposed to provide daily entertainment. In fact, if your investing feels exciting all the time, you're probably taking more risk than you realize.

The Bottom Line

Rebalancing is an investing habit that seems almost too simple to matter. Yet it quietly accomplishes several incredibly important goals all at once. It keeps your portfolio aligned with your long-term plan, controls your overall investment risk, and systematically encourages you to sell investments after they've appreciated while buying those that have temporarily fallen behind.

Whether you rebalance by buying and selling existing holdings or by directing new contributions toward whichever asset classes have become underweighted, the key isn't finding the perfect strategy. It's consistently following the strategy you've already chosen.

That's really the entire philosophy behind passive investing. Build a thoughtful plan. Automate as much as possible by creating a central investing habit. Ignore the day-to-day noise. Rebalance once or twice each year. Then let time and compounding do what they have historically done remarkably well.

Because when it comes to investing, boring isn't a weakness. It's usually a superpower.

What do you think? Is rebalancing the most important investing habit out there? How do you rebalance? When? Do you think another investing habit is more important? Let me know in the comments below!