Portfolio Rebalancing: Maintaining the Right Mix of Investments

In the ever-changing world of finance, maintaining the right mix of investments in your portfolio is crucial for achieving long-term financial goals. Market volatility can cause your portfolio to drift from its intended allocation, increasing risk and potentially derailing your investment strategy. This is where portfolio rebalancing comes into play. Rebalancing helps realign your investments with your original plan, ensuring that your portfolio remains on track.

Understanding Portfolio Rebalancing

Portfolio rebalancing involves adjusting the proportions of different assets in a portfolio to maintain the intended balance of risk and return. Over time, different assets will grow at different rates, causing the actual asset allocation to deviate from the target allocation. Rebalancing involves buying or selling assets to restore the original proportions.

Rebalancing is essential for several reasons. Firstly, it helps manage risk by ensuring that your portfolio remains aligned with your risk tolerance. Without rebalancing, your portfolio could become overexposed to more volatile assets, increasing overall risk. Secondly, rebalancing keeps your investments in line with your financial goals. For example, if your goal is to achieve a balanced mix of growth and income, rebalancing can help maintain that balance despite market fluctuations.

The consequences of not rebalancing can be significant. Over time, certain assets may dominate your portfolio, leading to an unintended risk profile. This drift can make it harder to achieve your financial objectives and can expose you to greater losses during market downturns.

How Portfolio Rebalancing Works

The first step in rebalancing your portfolio is to set your target asset allocation. This involves deciding how much of your portfolio to allocate to different asset classes such as stocks, bonds, and cash. Your target allocation should align with your risk tolerance, investment horizon, and financial goals. For example, a younger investor with a long-term outlook might lean towards a higher proportion of stocks, while a retiree might choose a more conservative allocation with a higher percentage of bonds.

Evaluating Current Portfolio

Once you have set your target allocation, the next step is to evaluate your current portfolio. This involves assessing the performance of your investments and comparing the actual allocation to your target allocation. Tools like investment tracking software or online brokerage platforms can help you perform this analysis easily.

Making Adjustments

If your portfolio has drifted from the target allocation, it is time to make adjustments. This typically involves selling overperforming assets that have grown beyond their target weight and buying underperforming assets that have fallen below their target weight. While making these adjustments, it is important to consider transaction costs and tax implications to avoid eroding your returns.

When to Rebalance Your Portfolio

One common strategy is time-based rebalancing, where you rebalance your portfolio at regular intervals, such as quarterly or annually. This approach ensures that rebalancing becomes a routine part of your investment management, reducing the risk of emotional decision-making.

Threshold-Based Rebalancing

Another approach is threshold-based rebalancing, where you rebalance only when your asset allocation deviates by a certain percentage from the target. For example, you might choose to rebalance if any asset class moves more than 5% away from its target allocation. This method can be more responsive to market conditions but requires closer monitoring of your portfolio.

Hybrid Approach

A hybrid approach combines elements of both time-based and threshold-based rebalancing. For example, you might set a regular rebalancing schedule but also check your portfolio periodically for significant deviations that warrant immediate action. This flexible strategy can help balance the benefits of both approaches.

Strategies for Effective Rebalancing

Automated rebalancing services offered by robo-advisors and financial institutions can simplify the rebalancing process. These services automatically monitor your portfolio and make adjustments as needed to maintain your target allocation. The benefits of automated rebalancing include convenience and the elimination of emotional biases. However, it is essential to understand the limitations and costs associated with these services.

Manual Rebalancing

Manual rebalancing involves personally monitoring and adjusting your portfolio. This approach gives you complete control over the timing and execution of rebalancing decisions. While manual rebalancing can be more time-consuming, it allows for greater customization and can help you better understand your investments. Tools and resources, such as investment tracking software and financial calculators, can assist in the manual rebalancing process.

Professional Rebalancing

For those with complex portfolios or limited time, hiring a financial advisor through platforms such as Saxo Capital Markets for rebalancing can be a valuable option. Professional advisors can provide personalised rebalancing strategies tailored to your financial goals and risk tolerance. They bring expertise and experience to the process, potentially enhancing the effectiveness of your investment strategy.


Portfolio rebalancing is a vital aspect of investment management that helps maintain the right mix of investments aligned to the current market situation to achieve your financial goals. By understanding the importance of rebalancing, evaluating your current portfolio, and making necessary adjustments, you can manage risk and enhance returns. Whether you choose automated, manual, or professional rebalancing, the key is to stay disciplined and proactive in maintaining your target asset allocation. Regular rebalancing ensures that your portfolio remains aligned with your investment strategy, providing a solid foundation for long-term financial success.