When you build an investment portfolio with a specific split between different assets (for example, 70% equities and 30% fixed income), that proportion doesn't automatically stay stable over time. Rebalancing is the tool to correct that drift.
Why your portfolio drifts from its original allocation
The different assets that make up your portfolio don't move at the same pace: if equities rise more than fixed income over a period, their relative weight within your portfolio increases above your original allocation, without you having made any active decision, simply as a result of how the market performs.
What rebalancing means
It consists of periodically adjusting your portfolio to bring it back to the asset allocation you originally decided on, which in practice means selling part of the asset that has grown above its target weight and buying the asset that has fallen below it, or directing new contributions toward the underweighted asset without needing to sell anything.
Why rebalancing is about discipline, not prediction
Rebalancing doesn't try to predict which asset will rise or fall in the future: it's precisely a strategy that systematically forces you to sell relatively more of what has gone up and buy relatively more of what has lagged behind, keeping your original risk level instead of letting it drift progressively out of control.
The two most common strategies for deciding when to rebalance
- Periodic rebalancing: reviewing and adjusting the portfolio on fixed dates (for example, once a year), regardless of how much it has drifted.
- Threshold rebalancing: adjusting only when the deviation from the target allocation exceeds a certain percentage (for example, 5%), rather than on fixed dates.
Keep the tax and transaction cost of rebalancing in mind
Selling assets to rebalance can trigger a taxable event (a capital gain subject to taxation) and transaction fees, factors worth considering when deciding how often to rebalance. Using investment funds, which allow switches without being taxed, or simply directing new contributions toward the underweighted asset, are ways to rebalance while minimizing this cost.
Don't confuse rebalancing with changing strategy
Rebalancing means returning to the original allocation you decided on beforehand, not changing that allocation based on your short-term expectations about the market, which would be a decision of a different nature (market timing), with a different risk profile and generally less advisable for individual investors.
Simulate your portfolio over the long term
Our compound interest calculator lets you project how your savings would evolve under different average return assumptions, useful for assessing the long-term effect of maintaining a constant risk allocation through rebalancing.