Rebalancing a Portfolio

Say you start with a 70% equity / 30% debt allocation. After a strong equity year, that might drift to 80/20 — you're now carrying more risk than originally intended, simply because equity grew faster. Rebalancing means selling enough equity (and buying debt) to bring the mix back to 70/30, which mechanically means selling some of what just went up.

This is valuable precisely because it removes emotion from a genuinely hard decision. Selling part of a rising asset feels wrong in the moment — most people want to let winners run — but disciplined rebalancing does exactly what a 'buy low, sell high' strategy requires, on a schedule, without needing to predict where markets go next.

A common approach is calendar rebalancing (once or twice a year, regardless of drift) or threshold rebalancing (whenever an allocation drifts more than roughly 5 percentage points from target). Threshold rebalancing reacts faster to large moves; calendar rebalancing is simpler to maintain and generates fewer unnecessary transactions.

One practical detail in taxable accounts: rebalancing by selling triggers capital gains tax. Where possible, rebalancing by directing new contributions toward the underweight asset class — rather than selling the overweight one — achieves a similar effect with less tax drag, though it works more slowly and needs ongoing new money to be effective.

Here is the arithmetic. Start with $10.4K split $7.3K equity and $3.1K debt. If equity gains 30% and debt gains 6% in a year, you hold $9.5K of equity and $3.3K of debt, a total of $12.8K, and equity is now about 74% of the portfolio instead of 70%. To return to 70/30 you would move about $520 from equity to debt, or direct future contributions to debt until the gap closes.

Before you sell anything, check the costs: exit loads on funds bought recently, capital gains tax on the units you sell, and any transaction charges. If the gap between your actual and target mix is small, doing nothing this year is usually cheaper than trading. Rebalancing too often does more harm than good, and for most people a yearly review, or a review when an allocation drifts about 5 percentage points, is enough.

Your target mix should itself change over time: it should shift toward safer assets as your goals approach or as you get older, which is why rebalancing pairs naturally with a life-stage plan. Write your rules down in one or two lines, such as the target percentages, the review date and the drift limit that triggers action. A written rule is much easier to follow when the market is making you nervous, because you're following a decision you made calmly earlier.