Rebalancing your investment portfolio is a crucial part of long-term financial planning. As markets move, your asset allocation can drift from your original targets, potentially increasing your risk or reducing your potential returns.
Whether you’re an experienced investor or just getting started, knowing when and how often to rebalance helps you maintain a healthy balance between risk and reward. With inflation, interest rate shifts, and global economic changes affecting markets, regular portfolio rebalancing ensures your investments remain aligned with your financial goals and risk tolerance.
Understand Why Rebalancing Matters
Rebalancing isn’t just a housekeeping task; it’s a key wealth management strategy for risk control and performance optimisation.
- Maintain your desired risk level by using effective risk management tools: Over time, some investments will grow faster than others, skewing your allocation. Rebalancing realigns your portfolio to your original risk profile.
- Lock in gains from outperforming assets: Selling high-performing investments allows you to realise profits and reinvest them into underweight areas. This promotes disciplined investing and avoids chasing returns.
- Prevent emotional decision-making: A regular rebalancing routine reduces the temptation to react emotionally to market movements. It encourages a systematic approach rooted in your long-term strategy.
Choose a Rebalancing Frequency That Suits Your Strategy
There’s no universal rule for how often to rebalance, what matters is consistency and relevance to your investment goals.
- Quarterly or semi-annual reviews are common: These intervals strike a balance between responsiveness and avoiding unnecessary trading. They are especially useful for diversified portfolios.
- Annual rebalancing works well for long-term investors: This approach reduces trading costs and capital gains tax while still keeping your allocation on track. It suits less active or hands-off investors.
- Use percentage thresholds to trigger rebalancing: Rather than sticking to a fixed schedule, some investors rebalance when an asset class drifts by 5% or more. This dynamic method focuses on meaningful changes.
Factor in Costs and Tax Implications
Frequent rebalancing can incur costs that may erode returns if not managed carefully.
- Consider trading fees and platform charges: Each transaction may come with a fee. Weigh these costs against the benefits of rebalancing before making changes.
- Be mindful of capital gains tax on sales: Rebalancing in taxable accounts can trigger capital gains liabilities. Using ISAs or pensions for rebalancing can reduce or eliminate this concern.
- Use new contributions to adjust the balance: Instead of selling and buying assets, allocate new money to underweight areas. This keeps your portfolio aligned without incurring transaction or tax costs.
Match Rebalancing with Life Changes
Your circumstances can affect your investment strategy and may signal a need to revisit your asset allocation.
- Adjust for major life events: Events such as marriage, having children, or approaching retirement may require a new risk approach. Rebalancing ensures your portfolio reflects your new priorities.
- Review after significant market events: Large market swings can dramatically shift your allocation. Use these as opportunities to check if rebalancing is warranted.
- Reassess your goals regularly: Your investment goals may change over time. A routine check-in ensures your strategy still matches your current needs.
Automate Where Possible for Consistency
Automation can help maintain discipline in your rebalancing efforts and reduce manual oversight.
- Use rebalancing tools or investment platforms: Many online investment services offer automatic rebalancing. This ensures your portfolio stays on track with minimal effort.
- Set alerts or calendar reminders: If you prefer a DIY approach, use digital tools to remind you of scheduled reviews. This encourages consistency even during busy periods.
- Consider model portfolios as guides: Following a professionally designed model portfolio helps provide structure and discipline in your allocation decisions.
Rebalancing is an essential practise to keep your investment portfolio healthy, aligned, and effective over time. While there’s no single right frequency, what’s most important is choosing a strategy that suits your goals, risk tolerance, and circumstances, and sticking with it.
Whether you opt for quarterly reviews, annual adjustments, or threshold-based triggers, a disciplined rebalancing approach helps you manage risk and stay focused on long-term success.
