Tips for Rebalancing Your Portfolio

Tips for Rebalancing Your Portfolio

A well-structured investment portfolio is like a finely tuned engine—it requires regular maintenance to perform optimally. Rebalancing is the process of adjusting your asset allocation back to its original target, ensuring your investments remain aligned with your financial goals. Here’s what you need to know about when and how to rebalance, and why it’s crucial for long-term investment success.

1. When and How Often Should You Rebalance?

Rebalancing isn’t something you need to do every week or even every month. Instead, consider rebalancing your portfolio once or twice a year or when your asset allocation drifts significantly from your target mix.

Here are three common strategies for deciding when to rebalance:

• Calendar-based rebalancing – Rebalance on a fixed schedule, such as annually or semi-annually.
• Threshold-based rebalancing – Adjust your portfolio when an asset class deviates from your target allocation by a certain percentage (e.g., 5-10%).
• Hybrid approach – Combining both methods to maintain balance while avoiding excessive trading.

2. The Importance of Returning to Your Target Allocation

Over time, market movements will cause certain asset classes to outperform or underperform, shifting your portfolio’s allocation. Without rebalancing, you may become overexposed to higher-risk investments or underexposed to safer assets. Returning to your target allocation helps you:

• Maintain your preferred risk level
• Lock in gains from outperforming assets
• Buy lower-priced assets before they recover

Rebalancing ensures your portfolio remains consistent with your long-term investment strategy rather than being dictated by short-term market movements.

3. The Effects of Rebalancing on an Indexed Portfolio

For index investors, rebalancing is particularly important. Indexed portfolios naturally drift as different sectors and asset classes perform differently. Regular rebalancing:

• Improves risk-adjusted returns by preventing overexposure to certain market trends
• Enhances portfolio stability by keeping investments diversified
• Encourages disciplined investing by buying low and selling high

Studies have shown that consistent rebalancing improves long-term portfolio performance by mitigating risk while maintaining exposure to growth opportunities.