Portfolio Rebalancing
Why a portfolio drifts away from its target allocation over time, and how periodically buying and selling brings it back.
Key idea
Rebalancing is risk management, not a return maximizing strategy. You chose your target allocation when you were thinking clearly, rebalancing keeps that decision in force after markets move.
What it is
Most portfolios have a target allocation: the mix of assets you chose to match your goals and risk tolerance, for example 60% stocks and 40% bonds. As markets move, those proportions drift away from the original plan. Rebalancing brings the portfolio back in line, trimming assets that have grown above their target and/or adding to those that have fallen below it.
Take a 60/40 stock and bond portfolio worth 10,000:
One good year for stocks and you hold roughly 65/35, noticeably riskier than what you signed up for. Drift also has a direction: money piles up in whatever has run the hardest, so the portfolio slowly concentrates in the most expensive asset.
How to rebalance
- 1
Calculate targets
Target % × total value. 60% × 11,500 = 6,900 in stocks.
- 2
Find the gaps
Current − target = drift. 7,500 − 6,900 = +600 overweight.
- 3
Trade the difference
Sell overweight, buy underweight. Sell 600 stocks → bonds.
The cheapest way: use new money
You can often skip selling altogether: direct new contributions to the underweight assets until the weights line up. In the example, adding 1,000 of new money to bonds and nothing to stocks, takes the portfolio to 7,500 / 5,000, which is 60/40 of the new 12,500 total.
No sale, no realised gains, no sell-side fees. For anyone in the saving phase, this is usually the best method to reach for.
When to rebalance
Two common methods:
- Calendar: Fixed schedule, e.g. quarterly, once or twice a year. Simple, easy to stick to.
- Threshold: Whenever any weight drifts beyond a set band, e.g. ±5 percentage points. Only reacts to big moves, ignores noise.
Vanguard's research found no optimal rule among reasonable approaches. A simple default is to check once or twice a year and rebalance at a 5-point drift. The rule matters because it removes emotion from the decision.
What it costs
- Trading costs: Every trade can carry a commission and a bid–ask spread.
- Taxes: In many countries, selling winners in a taxable account realises capital gains.
Because of these costs, most long-term investors rebalance rarely and lean on new contributions first.
Swiss note
For Swiss private investors, capital gains are generally tax-free, reducing the tax cost of rebalancing. Trading costs still apply: fees, spreads and stamp duty.
Key takeaways
- —Rebalancing controls risk. It isn't meant to increase returns.
- —Drift is automatic. Left alone, a 60/40 portfolio can slowly become 80/20, with the risk to match.
- —New contributions are the cheapest way to rebalance. No selling required.
- —Having a rule and following it matters more than which rule you pick.