Rebalancing Your Portfolio: Best Practices

Imagine steering a boat on a calm river. Even if you start straight, small drifts can slowly pull you off course if you don’t adjust the wheel. Investing works the same way. Markets move. Some investments grow faster than others. Without attention, your carefully crafted portfolio can shift into something riskier than you planned.

That’s why portfolio rebalancing is so important. It’s not about chasing returns or overreacting to headlines. It’s about realigning your investments with your original goals, calmly and thoughtfully.

In this guide, you’ll discover how rebalancing works, why it matters, and the best practices to keep your asset allocation healthy, helping you stay in control, even when markets throw surprises your way.

What is Portfolio Rebalancing?

A Simple Definition

Portfolio rebalancing is the act of adjusting your investments back to their original target percentages.

• Sell a little from what’s grown too much.
• Buy a little more of what’s fallen behind.
• Bring your portfolio back into balance.

Quick Analogy: Think of your portfolio like a garden. If one plant grows wild and shades the others, you trim it back to let everything thrive equally.

Why Rebalancing Your Portfolio Matters

1. Keeps Risk Under Control

Without rebalancing, your investments can drift into higher-risk territory without you noticing.

Example:

• You start with 60% stocks and 40% bonds.
• After a few strong years for stocks, you might unknowingly end up with 75% stocks.
• Now you’re exposed to bigger potential losses than you originally intended.

2. Helps You Lock In Gains

By selling part of the investments that have risen the most, you naturally sell high and buy low — a classic wealth-building principle.

3. Stops Emotions From Taking Over

Regular, scheduled rebalancing takes the emotion out of decision-making. No panic selling during a crash. No greedy buying during a boom.

4. Supports Long-Term Growth

Over decades, disciplined rebalancing can slightly improve returns and reduce volatility, helping you reach your goals with fewer bumps along the way.

How Often Should You Rebalance?

There’s no one-size-fits-all answer, but most experts suggest:

• Annually (e.g., every January)
• Semi-annually (every six months)
• Threshold-based (when an asset drifts more than 5% from your target)

Golden Rule: Pick a rebalancing schedule that fits your life and stick with it.

How to Rebalance Your Portfolio Step-by-Step

Step 1: Set Clear Asset Allocation Targets

First, decide what mix of assets suits your goals and risk tolerance.

Example targets:

Investor Type Equity % Bond % Conservative 40% 60% Balanced 60% 40% Growth-Oriented 80% 20%

Tip: You can also diversify across geographies (UK, US, emerging markets) and asset classes (real estate, commodities).

Step 2: Review Your Current Portfolio

Use your investment platform or an online tool to check:

• Current allocations by asset class.
• Which assets have drifted away from your targets.

Step 3: Identify Areas to Adjust

Focus on assets that have shifted significantly:

• Overweight? Sell some.
• Underweight? Buy more.

Threshold Tip: Some investors only rebalance when an asset drifts 5% or more from its target. This reduces unnecessary trading.

Step 4: Rebalance

You can rebalance by:

• Selling: Sell a portion of the assets that have grown too large.
• Adding new money: Direct new contributions to underweight areas (avoiding unnecessary sales).
• Diverting dividends: Reinvest dividends into underweight sectors.

Minimise costs: Prefer adjusting with new money if possible, especially outside of tax-advantaged accounts.

Best Practices for Smart Rebalancing

1. Automate Where You Can

Some investment platforms allow you to set automatic rebalancing rules:

• Reduces emotional interference.
• Saves time and effort.

2. Watch Out for Taxes

If you’re rebalancing outside of an ISA or pension:

• Selling can trigger capital gains taxes.
• Use your annual CGT allowance (\u00a33,000 in the UK for 2025).
• Consider harvesting losses to offset gains.

3. Mind the Costs

Every trade can come with:

• Dealing fees.
• Potential taxes.

Solution: Consolidate rebalancing actions into fewer transactions when possible.

4. Rebalance After Big Life Events

Adjust your allocation if:

• You approach retirement.
• Your risk tolerance changes.
• Major life milestones happen (e.g., buying a house, having children).

Rebalancing isn’t just about market moves. It’s about keeping your investments aligned with your life.

Rebalancing with Index Funds and ETFs

Index funds and ETFs make rebalancing beautifully easy:

• Broad diversification: Fewer trades needed to stay balanced.
• Low fees: Ideal for small, regular adjustments.
• Transparency: You know exactly what you’re buying and selling.

Example: You could hold:

• 70% in a global equity index fund (like Vanguard FTSE All-World).
• 30% in a global bond index fund.

One or two moves each year could keep your portfolio perfectly balanced.

Real-World Examples

Sarah: The Annual Rebalancer

• Every January, Sarah checks her Stocks & Shares ISA.
• She notices her stocks have grown to 68% from a target of 60%.
• She sells a small portion of stocks and buys bonds to restore balance.

Result: Steady risk profile, no surprises.

Jack: The New Money Rebalancer

• Jack invests monthly into his portfolio.
• When his bonds lag behind, he directs new money there instead of selling anything.
• This avoids unnecessary tax hits.

Result: Cost-efficient, hands-off rebalancing.

Common Mistakes to Avoid

1. Rebalancing Too Often

• Constantly adjusting for tiny movements wastes time and money.

Rule of Thumb: Focus on meaningful drifts (around 5% or more).

2. Ignoring Fees and Taxes

• Be strategic to minimise charges and taxable events.

3. Letting Emotions Drive Changes

• Stick to your plan.
• Don’t panic during downturns or get greedy during rallies.

Stay on Track with Simple, Consistent Rebalancing

Rebalancing isn’t complicated. It’s not about chasing the market or timing your moves perfectly. It’s about staying true to your goals while the world around you changes.

By following simple, scheduled rebalancing practices — whether annually, semi-annually, or based on thresholds — you can manage risk, lock in gains, and make your investing journey smoother and more rewarding.

Ready to keep your portfolio on course? Take a few minutes today to check your asset mix, set a rebalancing schedule, and commit to regular, thoughtful adjustments. Your future self will thank you!

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