When and How to Rebalance Your Portfolio

Understanding portfolio rebalancing and how it helps maintain your investment strategy over time.

What Is Rebalancing?

Rebalancing means adjusting your portfolio back to your original asset allocation. When you first invest, you might decide on 60% stocks and 40% bonds. Over time, if stocks perform well, they might grow to 70% of your portfolio. Rebalancing gets you back to your 60/40 split.

Why Rebalancing Matters

Without rebalancing, your portfolio can drift away from your intended risk level. If stocks do well for several years, you might end up with much more equity exposure than you planned, meaning you're taking more risk than intended.

When to Rebalance

There are two main approaches. Time-based rebalancing means checking your portfolio at set intervals – perhaps annually. Threshold-based rebalancing means only acting when an asset class drifts by more than a certain amount, say 5%.

How to Rebalance

The simplest method is to sell some of what's grown and buy more of what's lagged. If you're adding new money regularly, you can rebalance by directing new contributions to whichever asset class is underweight.

Rebalancing in Tax-Advantaged Accounts

Rebalancing is easiest in pensions and ISAs because you don't pay capital gains tax on sales within these accounts. If you hold investments in a taxable account, consider the tax implications before rebalancing.

The Behavioural Benefit

Rebalancing forces you to "buy low and sell high." When stocks have had a great run, it feels wrong to sell them, but that's exactly what rebalancing makes you do. Over time, this disciplined approach can enhance returns.

Don't Rebalance Too Often

While rebalancing is important, doing it too frequently can be counterproductive. Trading costs and potential tax bills can add up. Annual rebalancing is sufficient for most investors.

Rebalancing vs Market Timing

Rebalancing is not the same as market timing. You're not trying to predict which assets will do well next year. Instead, you're maintaining a consistent risk level regardless of market conditions.

How We Can Help

At Harmond Capital, we handle portfolio rebalancing for our clients. We'll set the right asset allocation and make sure your portfolio stays on track over time, taking into account tax efficiency.