By: Sean Gallagher, CFP®
Many investors begin the year with a carefully constructed portfolio that aligns with their goals and risk tolerance. However, as the year progresses, that portfolio may evolve into something different from what was initially intended. Markets move, sectors rotate, and performance varies across regions. Without realizing it, your portfolio may have “drifted”, leaving you with more risk than planned or less exposure to the areas that now offer opportunity.
Understanding Portfolio Drift
Portfolio drift occurs when market performance causes your asset allocation to deviate from its original target. Suppose you began the year with 60% in stocks and 40% in bonds. If stocks perform well while bonds stay flat, your portfolio might now be 68% in stocks and only 32% in bonds. That change can meaningfully increase your overall risk.
This drift doesn’t just happen between stocks and bonds. Within equities, you might become concentrated in one region or sector. For many U.S. investors, this means a growing overweighting in domestic large-cap stocks, particularly after years of U.S. market leadership. The problem is that such concentration can magnify volatility if trends reverse.
Left unchecked, portfolio drift turns a thoughtfully designed investment strategy into an accidental gamble. It’s not that your investments are “wrong,” but that your allocation no longer reflects your goals or risk tolerance.
The Role of Rebalancing
Rebalancing is the discipline of bringing your portfolio back in line with your target mix. It can feel counterintuitive because it often involves selling what has done well and buying what has lagged. Yet that is precisely the point. By trimming the winners and adding to underperforming areas, you maintain diversification and keep risk under control.
Rebalancing also enforces good investing behavior. It prevents you from letting emotion drive decisions and keeps your portfolio aligned with long-term goals. Many investors find that setting a consistent review schedule—such as once or twice a year—helps remove guesswork.
While taxes and transaction costs should be considered, failing to rebalance can be even more costly. A portfolio that drifts too far from its intended allocation can behave differently than expected during periods of market stress.
2025: A Real-World Example
The first three quarters of 2025 have highlighted how regional performance differences can reshape portfolios. The Russell 3000 Index, which represents the broad U.S. stock market, gained roughly 14.4% year-to-date through September, while the MSCI ACWI ex-U.S. Index, a measure of international equities, rose about 26.0% over the same period.
For an investor with a target of 70% U.S. equities and 30% international, this divergence likely resulted in their international weighting being higher than planned. At first glance, that may seem like a good problem to have—after all, the international side outperformed. But if markets reverse or the U.S. begins to catch up, that imbalance could expose the portfolio to unwanted volatility or currency risk.
Conversely, investors who were heavily tilted toward the U.S. may have missed a year when global diversification added significant value. In both cases, the lesson is the same: performance differences alter your risk exposure, often without you noticing. Rebalancing allows you to intentionally decide whether to maintain or adjust your targets rather than letting the market decide for you.
Bringing It All Together
As the year draws to a close, take time to review your portfolio. Compare your current allocation to your targets. Ask whether recent performance has pushed you outside your comfort zone, and if so, consider rebalancing before year-end. Doing so can help you lock in gains, restore balance, and ensure your portfolio reflects your true strategy—not just the market’s latest moves.
If you’d like guidance in evaluating your allocation or determining how 2025’s global market shifts have affected your overall plan, contact your HIGHLAND team. We can help you assess where your portfolio stands, identify the necessary adjustments, and guide you into the new year with confidence and clarity.
Sean Gallagher is a CERTIFIED FINANCIAL PLANNER™ and Wealth Advisor at HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Sean works directly with clients, advising them on their financial planning and investments to help achieve their goals. Sean graduated from Virginia Tech’s financial planning program, successfully passed the CFP® national exam in 2019, and has been with the firm ever since. He is also a member of NAPFA, a professional organization dedicated to serving fee-only advisors.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).