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What Is Portfolio Rebalancing?

Updated: Aug 1


What Is Portfolio Rebalancing?

Portfolio rebalancing describes the process of readjusting the asset allocation in a diversified portfolio after some time to the desired initial allocation in a portfolio.


For example, a portfolio might initially consist of 70% equities and 30% fixed-income investments. However, as equities and bonds perform differently over time, the portfolio's allocation is likely to shift. If equities outperform, while bonds yield lower returns, the portfolio's original balance will naturally tilt towards a great proportion of equities. Consequently, the equity ratio could rise to 80% of the portfolio, with fixed-income investments representing just 20%.


The below video provides a step-by-step explanation of rebalancing, illustrated with a calculation example.



Pros and Cons of Asset Portfolio Rebalancing

If equities performed significantly better than bonds, shouldn't you simply let it go to capitalize on the higher return from equities? Well, yes and no. On the positive side, a simple buy-and-hold strategy without rebalancing could indeed lead to higher returns. On the downside, your risk-adjusted returns may be lower over time. For example, your portfolio could experience higher volatility and deeper drawdowns during economic downturns. More insights into portfolio rebalancing and its impact on performance you can find here.


How to Do Portfolio Rebalancing Best

Rebalancing an investment portfolio is easy. There are many ways how to do portfolio rebalancing. By either selling a portion of the assets that have increased the most in value or by using cash flow from dividends or other income sources you generate the liquidity needed for rebalancing the portfolio to its initial allocation. A detailed overview of different types of portfolio rebalancing you can find here.


Different portfolio rebalancing strategies define which criteria are triggering the rebalancing process: calendar-based, threshold-based or a combination of both.


Finally, many investors are looking for tools to support their rebalancing activity. There are free web-based tools or rebalancing tools using MS Excel. Only a few cover tax neutral rebalancing, which does not trigger any profit tax from selling positions. Find out more about portfolio rebalancing tools here.


How often Do You Rebalance Your Portfolio?

  • Never

  • Not Regularly

  • Less often than a Year

  • Yearly




Disclaimer: The scenarios or investment products presented above should not be construed as investment advice. All investments involve some level of risk, and past performance is never a guarantee of future returns. As always, do your own research in order to validate and better understand the underlying risks.

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