Portfolio rebalancing: everything you need to know

While most investors wait for dramatic market shifts or year-end deadlines, there is something powerful about taking a moment to check in with your portfolio. It’s not about timing the market. It’s about ensuring your investments still align with your goals, your risk tolerance and where you are headed. 

Portfolio rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. 

For example, say the original target asset allocation for a growth-oriented investor is 80% stocks and 20% bonds. If the stocks perform well during a given period, the stock weighting of the portfolio might increase to 90%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 80/20. 

‘Rebalancing’, as a term, has connotations of an even distribution of assets – however, a 50/50 stock and bond split is not required. Instead, rebalancing a portfolio involves the reallocation of assets to a defined makeup, and applies whether the target allocation is 50/50, 80/20 or 40/60. Investors may also adjust the overall risk within their portfolios to meet changing financial needs. 

Rebalancing sounds technical, but it is more straightforward and more powerful than investors may realise.  

The primary objective of portfolio rebalancing is to safeguard the investor from being overly exposed to undesirable risks. Rebalancing is undertaken to ensure the amount of risk is consistent with the investor’s desired level. 

Your rebalancing checklist 

✓ Review your goals – have they changed? 

✓ Compare your current allocation to your target mix 

✓ Reassess your risk tolerance based on recent market movements 

✓ Buy and sell as needed to return to your target allocation 

While there is no one correct schedule for rebalancing a portfolio, a common approach is to examine allocations at least once a year. Say you started with a 50/50 split between growth assets (e.g. international equities) and defensive assets (e.g. fixed income). After a strong year in equities, you check in and find you’re now sitting at 65/35. Your portfolio has drifted. Rebalancing means bringing it back to 50/50. Here’s how: 

Step 1: Calculate what needs to move:  

• If you have $10,000 and you’re at 65% equities/35% fixed income but want a 50/50 split, you would shift $1,500 from equities to fixed income. 

Step 2: Choose your method: 

• Sell and reinvest: Sell $1,500 of your growth assets and reinvest those proceeds in defensive assets. You’re not adding new capital – you’re reallocating existing holdings. 

• Direct new contributions: If you’re regularly contributing to your portfolio, direct new funds to the underweight portion (defensive assets) until the balance returns to 50/50. 

Step 3: Apply this at the holding level:  

• This approach works within your equity allocations as well. For example, if your US tech positions have grown significantly and quickly, you might choose to reduce your exposure to that space and reallocate those proceeds to an ETF which provides broader international exposure.  

• You’re not exiting positions entirely – you’re adjusting the proportions to maintain your desired balance.The frequency of rebalancing depends on your approach – some investors rebalance on a set schedule, others when they notice their allocation has drifted meaningfully from their targets. 

Because rebalancing can involve selling assets, it often results in a tax burden. The process of rebalancing means you may incur capital gains tax on any profits made on the sale of investments. But if you don’t rebalance, you may find yourself overexposed to a market fall in one particular asset class.

Investors should always consider any taxation-related matters with their accountant or tax adviser.