Rebalancing a Portfolio: What It Means and When to Do It

Why Your Portfolio Drifts Over Time

When you first build an investment portfolio, you choose a specific mix of assets — for example, 70% stocks and 30% bonds — based on your goals and comfort with risk. This is your target allocation. The problem is that different assets grow at different rates. If stocks have a strong year, that 70% slice might swell to 80%, leaving you with more risk than you originally intended.

This gradual shift is called allocation drift. It is entirely natural and happens in every portfolio. Left unaddressed, drift means you could be taking on significantly more (or less) risk than your plan was designed for — without realising it. That misalignment can work against your long-term strategy, especially when markets eventually correct.

Understanding drift is the first step. The second step is knowing how to fix it. That is exactly what rebalancing does. If you are still deciding on your original mix, the guide on asset allocation across your lifetime explains how to choose a starting allocation that matches your life stage.

Two Common Rebalancing Approaches

There is no single correct way to rebalance. Most investors use one of two approaches — or a combination of both.

Calendar-Based Rebalancing

You review and adjust your portfolio on a fixed schedule — typically once or twice a year. This approach is simple and requires minimal monitoring. It works well for investors who prefer a low-maintenance strategy and want to avoid constantly watching the market.

Threshold-Based Rebalancing

You set a drift limit — say, 5% — and rebalance only when any asset class moves beyond that boundary. This is more responsive to actual market conditions and can reduce unnecessary trading during calm periods. It does require more regular check-ins to track your allocations.

Many beginner investors find calendar-based rebalancing easier to stick with, since it removes emotion from the decision. The annual investor review checklist is a useful companion for anyone using a once-a-year approach.

The Mechanics: How Rebalancing Actually Works

Rebalancing works by selling assets that are now overweight and buying those that are underweight. Suppose your target is 70% stocks and 30% bonds, but strong stock performance has pushed you to 80%/20%. To rebalance, you would sell some stocks and use the proceeds to buy bonds until you return to 70/30.

Alternatively — and often more tax-efficiently — you can simply direct new contributions toward the underweight asset class. If you invest a set amount each month, routing it toward bonds until balance is restored avoids selling altogether.

In tax-advantaged accounts such as a 401(k) or IRA, rebalancing is generally straightforward because trades do not trigger immediate tax consequences. In taxable brokerage accounts, selling appreciated assets may generate capital gains. Consulting a qualified tax professional can help you understand the implications for your specific situation before you act.

If you are still setting up the structure of your portfolio, the walkthrough for building a long-term portfolio from scratch covers the foundational decisions that make rebalancing easier down the line.

This article is for general informational and educational purposes only and does not constitute personalised financial, investment, or tax advice. Consult a licensed financial adviser or tax professional before making decisions based on your individual circumstances.