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Advanced · Lesson 5 of 6Rebalancing
Over time, winners grow to dominate a portfolio, raising its risk. Rebalancing sells some of what has risen and buys what has fallen to restore target weights. It enforces "buy low, sell high" without forecasting.
Common methods: calendar (once or twice a year), threshold (when any asset drifts more than, say, 5 percentage points), or using new contributions and dividends to top up underweight assets, which avoids selling and tax.
Rebalancing usually reduces risk more than it increases return. In strong one-way markets it can lag, but it protects against ending up far riskier than you planned just before a crash.
Key takeaways
- Rebalancing controls drift in risk.
- Use contributions and dividends to rebalance tax-efficiently.
- Its main benefit is risk control.
Check your understanding
1. Target 60/40. After a rally the mix is 70/30. Rebalancing means...
- Buying more shares
- Selling some shares and buying bonds
- Doing nothing
- Selling everything
Show the answer
Selling some shares and buying bonds. Restore the 60/40 target.
2. The most tax-efficient rebalancing method is often...
- Selling winners monthly
- Directing new money and dividends to underweight assets
- Day trading
- Using CFDs
Show the answer
Directing new money and dividends to underweight assets. It avoids triggering capital gains.
Go deeper
- Wikipedia: Rebalancing investments
- YouTube videos: portfolio rebalancing explained
- Investopedia: rebalancing
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