Rebalancing Your Portfolio: When and How

Once you've set an asset allocation (see our previous guide on asset allocation), it doesn't stay put on its own. If shares grow faster than bonds over a period, your portfolio ends up holding more shares than you originally intended, purely because of relative growth — not because you chose to increase your risk. Rebalancing is the process of bringing your portfolio back towards its original target split.

Why drift happens, and why it matters

Say you start with a target split between shares and bonds. If shares perform strongly over a few years, they'll naturally grow to represent a larger share of your total portfolio than your original target — meaning your actual risk level has quietly increased without any deliberate decision on your part. Left unchecked over many years, a portfolio can end up far riskier (or far more conservative) than originally intended.

Approach 1: Calendar-based rebalancing

One simple approach is rebalancing on a fixed schedule — for example, once a year — regardless of how far the portfolio has drifted at that point. This is simple to stick to and avoids overthinking, though it can mean rebalancing when drift is minor, or leaving a larger drift in place for months before the next scheduled check.

Approach 2: Threshold-based rebalancing

An alternative is rebalancing whenever an asset class drifts beyond a set threshold from its target (for example, five percentage points away from target) — checking periodically but only acting when drift is meaningful. This responds more precisely to actual drift but requires more ongoing attention than a fixed calendar date.

How rebalancing is actually done

Rebalancing generally means selling some of what has grown beyond its target share and buying more of what has fallen below it — bringing the split back towards target. For investors regularly adding new money, a simpler alternative is directing new contributions towards whichever asset class is currently under its target, gradually rebalancing through new money rather than selling existing holdings.

Tax and cost considerations

Selling investments to rebalance can trigger tax (such as Capital Gains Tax) outside a tax-efficient wrapper like an ISA or pension — inside an ISA or pension, this generally isn't a concern, which is one more reason those wrappers are useful beyond the headline tax relief (see our earlier guide on Stocks and Shares ISAs). Dealing charges are also worth factoring in in, especially if rebalancing frequently.

Rebalancing is not about chasing performance

It's worth being clear that rebalancing means selling some of what has done well and buying more of what has lagged — which can feel counterintuitive, even uncomfortable. The point isn't to chase whatever is currently performing best; it's to maintain the risk level you originally chose on purpose, rather than letting it drift based on which asset happened to grow fastest.

Funds that rebalance automatically

As mentioned in our asset allocation guide, many multi-asset or "ready-made" funds handle rebalancing automatically within the fund itself, which is one reason they appeal to investors who want a sensible, maintained allocation without manually tracking and rebalancing themselves.

This is general education, not personalised financial advice. Investing involves risk, including the risk of losing money, and past performance is not a guide to future returns. Nothing here recommends any specific investment — for anything genuinely complex or high-stakes, speak to a regulated financial adviser.