Portfolio Rebalancing: When and How to Do It
Portfolio rebalancing means periodically adjusting your investments back to your target asset allocation. It's a disciplined approach to managing risk and returns.
Why Rebalance?
Market movements cause your allocation to drift. If you target 70% equity and 30% debt, a bull market might shift you to 80/20. This means more risk than intended. Rebalancing forces you to sell high (trimming outperformers) and buy low (adding to underperformers).
When to Rebalance
Calendar method: Rebalance once a year (simple, effective). Threshold method: Rebalance when any allocation drifts more than 5% from target. Combination: Check quarterly, rebalance if drift exceeds threshold.
How to Rebalance
Option 1: Sell overweight assets, buy underweight ones. Option 2: Direct new investments into underweight categories (tax-efficient). Option 3: Use STP to gradually shift between funds. Tax tip: Rebalance within tax-free limits to minimize capital gains tax.