Rebalancing: returning to the target weights

A portfolio built to set weights stops matching them over time: assets that rose take up more space, those that fell take up less.

What rebalancing does

It returns the weights to their targets: part of what rose is sold and the proceeds go into what lagged.

Why it works

It forces action against the mood. Selling what is rising and buying what is falling is psychologically hard — which is exactly why the rule has to be mechanical rather than re-decided each time.

By which rule

By calendar — once a year or every six months. By deviation — when a weight has moved from target by more than a set amount. Both work; what matters is that the rule was chosen in advance.

Rebalancing too often raises costs and taxes without adding benefit.

The tax caveat

Selling an asset that rose creates a taxable event and resets the holding period for relief — Long-term ownership relief: paying no tax without arranging anything in advance.

Hence a practical technique: rebalance not by selling but by directing new contributions into the laggards. It works while the portfolio is still being topped up.

What rebalancing does not do

It offers no rescue from choosing the wrong assets. Regularly adding to an asset in structural decline is regularly increasing a losing position.

Related: The index approach: buying the whole market and Asset allocation: the decision that shapes everything else.