Educational only. This article explains a general concept and is not financial advice or a recommendation. Rules, costs, and tax treatment vary significantly by country and account type, and they change. Speak to a qualified adviser about your own circumstances.
Set a portfolio to a deliberate mix — some proportion in shares, some in bonds, whatever your plan calls for — and markets immediately start pulling it out of shape. Whatever has performed best grows into a larger slice, and whatever lagged shrinks. Nobody decided this. It just happens, quietly, and it can go on for years.
Rebalancing is the act of returning the portfolio to its intended mix. The key thing to understand up front: rebalancing is a risk-control tool, not a return-boosting one. Its job is to stop your portfolio drifting into a risk level you never chose. Sometimes that also helps returns, sometimes it costs you a little in a long rising market. Getting clear on which of those you're chasing prevents a lot of confused decisions.
What drift actually changes
Say you chose a mix intended to be moderately growth-oriented, with a meaningful share in bonds to soften the bad years. After a long run in equities, the share portion has grown and the bond portion has shrunk as a proportion of the whole. Nothing in the account looks wrong — the balance is higher than ever.
But the portfolio is now more exposed to a sharp equity fall than the one you designed. The next serious drawdown would hit harder, and it would hit a portfolio whose owner never consciously agreed to that. Drift can run the other way too: after a bad stretch, a portfolio can end up more defensive than intended, which quietly reduces exposure to any recovery.
This is why rebalancing sits in the risk box rather than the returns box. The concept only makes sense if you have a target in the first place — if you're not sure what yours is or why, start with how to build a diversified portfolio, because rebalancing without a target is just trading.
The two common approaches
Calendar rebalancing. Check on a fixed schedule — annually, semi-annually, quarterly — and restore the target mix. Its virtue is that it's simple, automatic, and requires no market-watching. Its weakness is that the date is arbitrary: markets don't know when your review is due, so you might rebalance after a small drift while a large one happens the following week.
Threshold (or band) rebalancing. Set a tolerance around each holding — for example, act only when an allocation moves more than a set number of percentage points away from its target — and rebalance when a band is breached. It responds to what's actually happened rather than to the calendar, but it requires monitoring, and in a volatile period it can trigger more often than you'd like.
In practice, many people combine them: check on a schedule, but only act if a band has been breached. That gives you a fixed, low-effort routine and stops you trading on noise. Whichever you pick, the important part is deciding it in advance and writing it down, because the moment you'll least want to rebalance is exactly the moment your rule says you should.
Wider bands mean fewer transactions and more drift; narrower bands mean tighter control and more cost. There's no universally correct width — it depends on your costs, your tax situation, and how much drift you can genuinely live with.
Rebalance with contributions before you rebalance by selling
The cheapest rebalancing usually involves no selling at all.
If you're still adding money — monthly contributions, a bonus, dividends you haven't set to reinvest automatically — direct the new money into whatever is currently below its target. Over time this nudges the portfolio back towards its mix without triggering a sale, without a transaction on the sell side, and, in a taxable account, without realising a gain.
The same works in reverse if you're drawing an income from the portfolio: take withdrawals from whatever is currently above target. In a retirement context, this interacts usefully with the sequencing issues covered in sequence-of-returns risk.
Contribution-based rebalancing has limits — if your portfolio is large relative to what you're adding, new money won't move the needle enough, and you'll eventually need to sell something. But it should be the first tool you reach for.
The frictions that decide how often
Rebalancing is not free, and the costs are the main argument against doing it too frequently.
Transaction costs. Commissions where they still apply, plus the bid–ask spread on whatever you trade, and any platform charge for the transaction. Small per trade, but they compound if your rule triggers often.
Fund mechanics. Minimum investment or minimum trade sizes, settlement timing, and — with anything traded on an exchange — the risk of trading at a poor price if you're careless about how the order is placed.
Tax. In many countries, selling an asset that has risen in a taxable account can realise a taxable gain, which converts a portfolio-maintenance exercise into a tax event. In tax-advantaged or tax-deferred accounts, that generally isn't triggered — which is why rebalancing inside those accounts, and using contributions elsewhere, is a common approach. Tax rules differ enormously between countries and account types, and they change; check your own rules or ask a qualified adviser rather than assuming.
Your own time and attention. A rule you'll actually follow beats an elaborate one you'll abandon.
Put together, these frictions are why very frequent rebalancing tends to be self-defeating, and why once or twice a year with a tolerance band is a routine many long-term investors find workable.
If your fund already does it for you
Multi-asset funds, "balanced" funds, and target-date or lifestyle funds typically rebalance internally to their stated allocation, and target-date funds also shift that allocation over time by design. If your entire portfolio is one of these, rebalancing is handled inside the fund and you don't need to do it yourself.
Where it gets fiddly is a mixed setup — a target-date fund plus a few individual holdings. Then the thing that drifts is the overall mix across everything, and you have to look at the whole picture rather than at each account separately. Check your fund's own documentation for what it actually does; don't infer it from the name.
The part nobody warns you about
Rebalancing asks you to sell some of what has done well and buy more of what has done badly. That is emotionally backwards, and it's where most rebalancing plans quietly die — usually with a sentence like "I'll leave it, it's still going up."
Two things help. First, write the rule down before you need it, including the band widths and the review dates, so the decision is already made when the moment arrives. Second, remember what you're actually doing: not predicting that the laggard will recover, simply refusing to let the portfolio become something you never chose. That reframe makes the trade much easier to execute.
FAQ
How often should I rebalance? There's no single right answer. Many long-term investors review annually or semi-annually and act only if an allocation has drifted beyond a set tolerance. The right frequency for you depends on your costs, your tax position, and how much drift you can tolerate — worth discussing with a qualified adviser.
Does rebalancing increase my returns? Not reliably. It's primarily a way of keeping risk near the level you chose. In some periods it helps returns; in a long, sustained rise in one asset class it can reduce them relative to simply letting the winner run — while also leaving you more exposed when that run ends.
Should I rebalance during a crash? Your rule should answer that, not your mood — which is exactly why the rule is written in advance. Sharp falls are also when tax, cost and liquidity considerations matter most, so it's a reasonable moment to take professional advice.
Can I rebalance without selling anything? Often, yes — by directing new contributions, dividends, or interest towards whatever is under target. It's slower, but usually the cheapest and most tax-efficient route where it's available.
What if my portfolio is spread across several accounts? Look at your target mix across the whole portfolio rather than account by account, then make the actual trades in whichever account carries the lowest cost and tax friction. If you're still building the basics, the investing basics guide sets out the vocabulary.
Write down your target mix and the drift you'd tolerate before you check your account again — deciding it in advance is the whole point. For more plain-language explainers on risk, allocation and long-term planning, browse TopInvestors.
