Rebalancing is a rule that makes you sell what went up

Most explanations of rebalancing stop at the point where it starts to matter. This one carries on.

Drift is automatic

If one part of a portfolio rises faster than another, its share of the total grows without anyone deciding it should. A mix set at seventy per cent equities can become eighty-five after a strong run, which is a different level of risk from the one chosen. The drift is always towards whatever has performed best recently, which is the opposite of what a cautious process would do.

Rebalancing is simply the act of returning to the intended proportions.

It is a risk control, not a return enhancer

Whether rebalancing improves returns depends on how markets behave, and the evidence is mixed and period-dependent. What it does reliably is keep the portfolio at the risk level you selected, which is a clearer and more defensible objective. Claims of a reliable rebalancing bonus overstate what is known, particularly over shorter periods.

On the balance sheet, framing it as maintenance rather than as a strategy sets the right expectation.

Calendar or threshold

Calendar rebalancing checks on a fixed schedule, typically annually, and adjusts if needed. Threshold rebalancing acts only when an allocation drifts beyond a set band, such as five percentage points. Threshold approaches trade less in calm periods and more in volatile ones, which is generally the better fit for the purpose.

The arithmetic is straightforward: both work, and the choice matters far less than actually doing it.

Rebalance with new money where possible

Directing new contributions to whatever is below target moves the allocation without selling anything. This avoids transaction costs and, in taxable accounts, avoids realising gains, which can be the larger consideration. For portfolios still in the accumulation phase, contributions are often sufficient to keep drift within a reasonable band.

Selling becomes necessary mainly when contributions are small relative to the portfolio, or when drift is large.

The tax question comes first in taxable accounts

Selling to rebalance can realise a taxable gain in many jurisdictions, and that cost is immediate while the benefit is diffuse. Rebalancing inside sheltered accounts avoids this entirely, which is an argument for holding the more volatile assets there where possible.

Some systems tax gains only on disposal, others annually, and the difference changes the optimal frequency considerably. How this applies to you depends on local rules and personal circumstances, and warrants professional advice before acting.

The right answer depends on your tax situation, which this cannot see.

The behavioural difficulty is the point

Rebalancing requires selling the holding that has done well and buying the one that has not, which feels wrong every time. That discomfort is the mechanism: it enforces the discipline of not letting recent performance dictate the allocation. Written rules, decided in advance and applied on a schedule, are what make it survivable.

Anyone who cannot bring themselves to do it should consider whether a fund that rebalances internally is a better fit for them.

The takeaway

Set the target, set the band, and act on the rule rather than on how the holdings feel.

The decision is rarely about picking the best option — it is about avoiding the expensive one.