Building a portfolio is only the beginning of an investing journey. Once your investments are in place, they will not stay perfectly balanced forever.
Many beginners assume that once a portfolio is built, the hard work is done. In reality, keeping a portfolio aligned with your goals can be just as important as building it in the first place.
As markets move, some investments may grow faster than others, causing your portfolio to gradually drift away from its original allocation. This is where rebalancing comes in.
Rebalancing is the process of adjusting a portfolio to bring it back in line with your intended investment mix. While it may sound technical, it is simply a way of helping your portfolio stay aligned with your goals and risk tolerance over time.
Let’s break down what rebalancing means, why investors use it and how it can help keep a long-term investment strategy on track.
What Is Rebalancing
Rebalancing means adjusting the weight of investments within a portfolio to bring them back towards a target allocation.
Think of your portfolio like a car on a long road trip. When you begin the journey, the wheels are aligned correctly and the car is travelling smoothly in the direction you intended. Over time, hitting bumps, potholes and uneven road surfaces can gradually pull the alignment slightly off course.
Rebalancing is like making those occasional, small maintenance adjustments to keep the car heading exactly where you originally planned to go.
For example, imagine an investor starts with a portfolio split between:
- 60% invested in shares
- 40% invested in bonds
If shares perform strongly over the next year while bonds remain relatively stable, the portfolio might eventually shift to a mix of 75% shares and 25% bonds.
The portfolio is now taking on significantly more risk than the investor originally intended. Rebalancing helps restore the original allocation.
Why Do Portfolios Drift Over Time
Financial markets rarely move in perfect sync.
Different investments perform differently depending on economic conditions, interest rates, company earnings and investor sentiment.
As a result, some parts of a portfolio may grow faster than others. This is completely normal.
In fact, portfolio drift can often be a sign that certain investments have performed well. However, it can also change the overall risk profile of a portfolio if left unchecked for long periods.
Why Does Rebalancing Matter
Many investors build portfolios with a specific goal in mind. Their asset allocation is designed to reflect their financial objectives, investment timeframe and comfort with risk.
If a portfolio drifts too far from its original allocation, it may no longer reflect those intentions. If left unchecked for long periods, a portfolio may gradually become more aggressive or more conservative than originally intended, potentially exposing an investor to a level of risk that no longer matches their goals.
Rebalancing can help investors:
- Maintain their desired level of risk
- Avoid becoming overly concentrated in one asset class
- Stay aligned with long-term goals
- Maintain a disciplined investment approach
Rather than chasing whichever investment has performed best recently, rebalancing encourages investors to focus on their broader strategy.
The goal of rebalancing is not necessarily to improve performance, but to help maintain the balance and level of risk an investor originally chose.
Why Can Rebalancing Feel Uncomfortable
One of the interesting things about rebalancing is that it can sometimes feel counterintuitive. This feeling is completely normal and something many long-term investors experience.
In some cases, rebalancing may involve selling a portion of investments that have performed well and adding to investments that have lagged behind.
Many investors naturally feel tempted to keep adding money to recent winners. However, rebalancing is less about predicting future performance and more about maintaining the balance that was originally intended.
How Often Should Investors Rebalance
There is no single rule that works for everyone.
Some investors review their portfolios periodically based on specific schedules or market shifts.
Common triggers for a portfolio review include:
- Every six months
- Once a year
- When allocations move beyond a certain percentage range
For many long-term investors, rebalancing does not involve constant buying and selling. Instead, it is often a periodic review to ensure the portfolio still reflects their goals.
Many investment funds and managed portfolios also rebalance automatically, reducing the need for investors to make manual adjustments themselves.
Can Beginners Keep Rebalancing Simple
Absolutely.
Rebalancing does not always require selling investments. Some investors choose to use new contributions to gradually bring their portfolio back towards its target allocation.
Many beginners assume rebalancing requires complex calculations or constant market monitoring. In reality, it can often be much simpler than people expect.
Example: A beginner investor contributes a fixed £100 each month into an investment platform designed to maintain a 60% share allocation and a 40% bond allocation. Over the year, strong market growth causes the share portion to drift up to 70%.
Rather than constantly buying and selling assets, the investor sets a calendar reminder for a single annual review. To bring the portfolio back into balance, they simply redirect their upcoming monthly £100 contributions entirely into the bond portion until the target 60/40 split is restored.
This method allows investors to stay focused on long-term goals without becoming distracted by short-term market movements.
Many successful investors spend more time following a consistent process than trying to predict what markets will do next.
Bottom Line
Rebalancing is the process of adjusting a portfolio to bring it back towards its intended asset allocation.
As investments grow at different rates, portfolios naturally drift over time. Rebalancing can help investors maintain their desired level of risk, stay aligned with long-term goals and avoid becoming overly concentrated in a single area of the market.
While every investor’s approach may differ, understanding how rebalancing works can help you build a more disciplined and consistent long-term investment strategy.
