Portfolio Rebalancing: Why and How Often

Why an allocation drifts on its own

If equity outperforms debt for a few years, a portfolio that started at 70% equity/30% debt might drift to 85%/15% - without you having done anything actively, your risk level has quietly increased, simply because one asset class grew faster than the other.

What rebalancing actually does

Rebalancing means selling a portion of the outperforming asset and buying more of the underperforming one, to bring the allocation back to your original target - effectively enforcing "sell high, buy low" mechanically, rather than relying on getting market timing right on judgment alone.

Common approaches to when

• Calendar-based: rebalance once a year (or every 6 months), regardless of how much drift has happened.
• Threshold-based: rebalance only when an asset class drifts beyond a set band (e.g., more than 5-10 percentage points from target) - avoiding unnecessary transactions for minor drift.

A practical consideration: taxes and exit loads

Rebalancing by selling can trigger capital gains tax and possibly exit loads - see our capital gains article. A tax-efficient alternative many investors use is directing new contributions toward the underweight asset class instead of selling the overweight one, achieving a similar effect gradually without triggering a taxable sale.

The takeaway

An allocation left alone doesn't stay put - periodic rebalancing, even just once a year, keeps your actual risk level aligned with the one you originally chose.