There are two simple ways to rebalance your investment portfolio.
While these methods work best for investments in diversified assets such as mutual and exchange traded funds, they can also be employed for non-diversified assets as well.
Perhaps your target asset allocation is 70% U.S. equities and 30% U.S. bonds. Within the target allocation you have an acceptable absolute range of +/- 10%. After your latest portfolio review, you find that your actual asset allocation in 55% U.S. equities and 45% U.S. bonds.
You need to bring your portfolio back in line with your target allocation.
What do you do?
Divest and Reallocate the Proceeds
The obvious solution.
Sell 15% of your bond holdings and purchase equity investments with the proceeds.
The trouble with this method is that you may incur costs on the rebalancing transactions.
One cost may be fund company commissions on purchases and redemptions.
If you own front or back-end load funds – do not invest in load funds unless you are convinced they are worth it in special circumstances – you may need to pay a sales fee to the mutual fund company. This can be quite onerous, especially for back-end load funds where you redeem relatively soon after acquisition.
There may also be brokerage commissions paid.
Sometimes these are waived on no-transaction fee funds, but often there is a holding period required before you are safe. When buying no-transaction fee funds through your broker, read the fine print to see what, if any, charges you will incur on early redemptions.
For example, according to TD Ameritrade  in the U.S., their “No-transaction fee (NTF) funds (except ProFunds and Rydex) held 180 days or less are subject to a Short-Term Redemption fee, which is a flat fee of $49.99. This fee is in addition to any fees addressed in the fund’s prospectus.”
The final hard cost associated with divesting and reallocating may be capital gains taxes payable.
In our example, perhaps you initially invested USD 10,000 into U.S. equities (target 70% = USD 7000) and U.S. bonds (target 30% = USD 3000). During your review, the equities stayed flat at USD 7000 (actual 55%), but the bonds appreciated in value to USD 5800 (actual 45%).
If you sold enough bonds to revert to the target allocation of 30%, you would have a profit of about USD 1064. Assuming all is capital gains, that capital gains are taxed at 20% (the rates differ significantly between jurisdictions), and your investments are not in a tax-sheltered account, you would owe the government USD 213 simply because you wanted to rebalance.
It may not sound like much, but your tax liability equates to 2% of your entire portfolio. That is an expensive fee to pay.
While divesting and reallocating may be the obvious solution, it may not be the best option outside of a tax-deferred investment account.
As an aside, always make use of tax deferred investment accounts  if they are available.
Reallocate Future Acquisitions
Perhaps not as rapid a solution as divesting, but one that avoids immediate tax consequences.
If you have the investment capital on hand, you can purchase enough of the under-weighted asset to bring it back in line with the target allocation. But many investors do not have lump sums on hand to invest in one transaction.
Fortunately, this method also dovetails nicely for investors who utilize the dollar cost averaging  approach to accumulating assets.
In our example above, let us say that you invest USD 300 per month. Under your target allocation, you would allocate your acquisitions at USD 210 to equities and USD 90 to bonds.
However, to bring yourself back in line with your master target allocation, you will have to alter your monthly split. You could reallocate future allocations to 100% equities until such time that your overall portfolio reverts to your target 70-30 ratio. At that point, you can go back to your original investment split.
In our example, the actual allocation had become USD 7000 equities (55%) and USD 5800 bonds (45%). If you allocate all USD 300 each month to equities, you could gradually get back to your target levels without triggering any tax liability. In this case, assuming that both the equities and bonds do not change in price, it would take about 24 months to reach your target allocation again.
Not the fastest method, but one that avoids taxes.
The advantage of divesting and reallocating is that it is a quick fix. The downside is that you may incur costs on the rebalancing, especially relating to capital gains taxation.
Using future investment capital to adjust your asset allocation over time is a much slower process. How slow depends on your periodic contributions and the amount you need to adjust. While you will incur transaction costs on those future acquisitions, your total expenses relating to the readjustment will be less. Why? Because you are not disposing of profitable assets and triggering any tax liability on realized capital gains.
Me? I prefer the lower costs associated with reallocating future purchases.
But for you it may be different.
Just make sure you watch the costs, especially the taxes.