Rebalancing Your Portfolio
What is it?
Rebalancing means periodically adjusting your portfolio back to your target asset allocation, since market movements naturally shift the balance over time — a strong equity rally, for example, can push your equity allocation well above your original target.
Why should you care?
Without rebalancing, a portfolio can drift into a risk level you never intended — becoming more aggressive after a rally (right before a possible fall) or more conservative after a decline (missing the recovery).
Real-life example
An investor starts with a 70:30 equity-to-debt allocation. After two strong years for equities, the portfolio drifts to 82:18 without any new investment decision. Rebalancing means selling a portion of equity and moving it into debt to restore the 70:30 target — locking in some gains and reducing risk back to the intended level.
Common mistakes
- Never rebalancing, letting allocation drift indefinitely with market movements.
- Rebalancing too frequently (e.g., every month), which increases costs and taxes without a meaningful benefit.
- Rebalancing based on emotion during a downturn rather than a pre-decided allocation target.
Illustrative rebalancing example
| Stage | Equity | Debt |
|---|---|---|
| Target allocation | 70% | 30% |
| After 2-year equity rally (before rebalancing) | 82% | 18% |
| After rebalancing | 70% | 30% |
FAQ
How often should I rebalance?
Many investors rebalance annually, or whenever an asset class drifts more than 5-10 percentage points from its target — both are reasonable, low-effort approaches.
Does rebalancing have tax implications?
Yes — selling units to rebalance can trigger capital gains tax (see Level 8: Taxes). This is one reason not to rebalance too frequently.
Can rebalancing be done through fresh investments instead of selling?
Yes — directing new SIP or lump-sum money toward the under-allocated asset class is often a lower-cost way to rebalance than selling existing holdings.
Should I rebalance during a market crash?
A pre-decided rebalancing rule (based on drift from target, not emotion) can actually mean buying more equity when it's cheaper after a fall — the opposite of panic-selling.
See this concept applied to your own portfolio
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