What Is Rebalancing?

Rebalancing means adjusting your portfolio back to its target allocation. Over time, some investments grow faster than others, throwing your carefully planned mix out of balance. Rebalancing restores your intended risk level.

Example: Drift in Action

Target Allocation

80% stocks / 20% bonds

Your intended risk level when you set up the portfolio.

After Strong Stock Year

85% stocks / 15% bonds

Stocks grew 20%, bonds grew 5%. You're now taking more risk than intended.

Rebalancing Action

Sell stocks → buy bonds

Return to 80/20. Or direct new contributions to bonds until balance is restored.

Why Rebalance?

Maintain Your Risk Level

If you decided 80/20 was right for you, drifting to 90/10 means more risk than intended. You'll be more exposed when the next crash comes.

Systematic Buy Low, Sell High

Rebalancing forces you to sell what's grown (expensive) and buy what's lagged (cheap). The opposite of emotional investing.

Prevents Concentration Risk

Without rebalancing, your portfolio could become dominated by whatever performed best, leaving you vulnerable if that sector reverses.

When to Rebalance

Rebalancing Approaches

Calendar-Based

Simplest

Rebalance on a fixed schedule — annually or semi-annually. Set a reminder and do it regardless of market conditions.

Threshold-Based

Precise

Rebalance when any asset class drifts more than 5% from target (e.g., 80% becomes 85% or 75%).

Cash Flow-Based

Tax-Smart

Direct new contributions to underweight assets rather than selling. Avoids transaction costs and potential taxes.

For most people, annual rebalancing is sufficient. More frequent rebalancing doesn't significantly improve returns and increases costs.

How to Rebalance

Method 1: Sell and Buy

Calculate current allocation percentages
Compare to target allocation
Sell overweight assets
Buy underweight assets

Best for: Tax-sheltered accounts (ISA, pension) where no tax applies.

Method 2: Cash Flow Rebalancing

Calculate current allocation
Identify underweight assets
Direct new contributions 100% to underweight assets
Continue until balance is restored

Best for: Taxable accounts, those adding regular contributions, minimising transaction costs.

The Annual Portfolio Review

Your Annual Checklist

Review current allocation vs target

Check fund expense ratios — any cheaper alternatives?

Verify you're using full ISA allowance

Check pension contributions and employer match

Has your risk tolerance changed? (new job, family, age)

Are your goals still the same?

Rebalance if allocation has drifted 5%+

What NOT to Do

Don't: React to Headlines

If stocks crashed, bonds are now overweight — you should buy more stocks, not sell. Rebalance to your plan, not the news.

Don't: Rebalance Too Often

Monthly rebalancing incurs more costs and doesn't improve long-term returns. Stick to your schedule, ignore the noise.

Don't: Time the Rebalance

"I'll wait for stocks to recover before rebalancing." This defeats the purpose. Rebalance on schedule regardless of market conditions.

Adjusting Allocation Over Time

As you age or your circumstances change, your target allocation might need to shift:

Approaching retirement: Gradually reduce stock allocation (e.g., 90→70→60% over 10–15 years)
Major life change: Review if your risk tolerance has changed
Major goal achieved: If you hit your retirement number, you might reduce risk

Action Steps

Document your target asset allocation
Calculate your current allocation percentages
Set a calendar reminder for annual review (same date each year)
Decide: sell/buy rebalancing or cash flow rebalancing?
If allocation has drifted 5%+, rebalance now

"Some platforms rebalance automatically. If you procrastinate, consider using one — or an all-in-one fund that does it internally."

Automate discipline wherever possible

Put It Into Practice

Use our Compound Interest Calculator to model how your portfolio might grow with consistent rebalancing over time.

Try Compound Interest Calculator