Rebalancing
Over time, winners grow into a larger share of a portfolio than intended. Rebalancing returns the mix to the weights you chose deliberately.
Why this matters for beginners
Without rebalancing, risk drifts upward silently. The holding that performed best becomes the one that determines your outcome.
Main explanation
Rebalancing means selling some of what has grown beyond its target weight and adding to what has fallen below it, returning to the intended mix.
Two common approaches: calendar-based, such as annually, or threshold-based, when a weight drifts more than a set amount from target.
Adding new money to underweight holdings achieves much of the same effect without selling, which avoids costs and taxes.
Rebalancing is a risk control rather than a return maximiser. In a long rising market it can reduce returns while keeping exposure where you intended.
Example using a real company
A holding intended at ten percent that grows to twenty-five percent means a quarter of the portfolio now depends on one company.
- →Annual rebalancing back to target weights.
- →Threshold rebalancing when a holding drifts five percentage points from its target.
Common beginner mistakes
- ✕Rebalancing frequently and incurring unnecessary costs and tax.
- ✕Never rebalancing and letting one holding dominate.
- ✕Expecting rebalancing to increase returns.
Key terms
- Target weight
- The intended share of a portfolio for a holding.
- Drift
- The movement of actual weights away from targets.
- Threshold rebalancing
- Rebalancing only after drift exceeds a set limit.
Key takeaways
- 01Rebalancing controls risk drift, not returns.
- 02Calendar or threshold rules both work if followed.
- 03New contributions can rebalance without selling.
Check yourself
- 01Without rebalancing, a portfolio's risk profile drifts over time.
- 02Rebalancing is primarily a way to increase returns.
- 03Directing new contributions to underweight holdings can rebalance without selling.
Try the concept on a real company
Note the weights you would want for the companies you follow in the Analyzer, then compare them with what you actually hold.
Educational examples only. Not buy or sell recommendations.