Portfolio rebalancing
Definition
Portfolio rebalancing restores your target allocation after price moves shift the weights, e.g. by trimming what has grown or by directing new deposits.
Rebalancing means restoring your target allocation after price moves have shifted it. If your plan is 60% stocks and 40% bonds, and after a good year on the market stocks make up 70% of the portfolio, rebalancing brings it back to 60/40.
The main purpose of rebalancing is to control risk, not to boost returns. Without it, the portfolio relies more and more on whatever has grown fastest lately and becomes riskier than you intended.
When to rebalance
- On a calendar: e.g. once a year or every six months, regardless of the market.
- On a threshold: when an asset class drifts from its target by a set amount, e.g. 5 percentage points.
- Combined: you check the portfolio regularly but act only when a threshold is crossed.
How to rebalance
- Sell part of what is overweight and buy what is underweight.
- Direct new deposits to underweight assets without selling anything.
- Use dividends and interest to top up the missing part.
Selling usually means realizing a gain, and so tax and commissions. That is why many investors prefer to rebalance with new deposits and keep selling for larger deviations, or rebalance inside tax-advantaged accounts such as the Polish IKE and IKZE.
Related terms
All terms- Portfolio allocationPortfolio allocation is how your money is split between asset classes such as stocks, bonds and cash, and within them between regions, sectors and currencies.
- Portfolio diversificationPortfolio diversification is spreading investments across many assets, sectors and regions, so a weak result in one of them does not decide the outcome of the whole.
- Portfolio volatilityPortfolio volatility measures how much its returns swing. It is usually calculated as the standard deviation of daily, monthly or yearly returns.