What Is Rebalancing?
A portfolio that started at 60% stocks, 40% bonds became 75% stocks, 25% bonds after one year. Restoring it to 60:40 is rebalancing.
Why Rebalancing Is Needed
Even if you set target weights and invest accordingly, if each asset's return differs, the weights drift over time.
Example: a 60% stocks, 40% bonds portfolio. After one year in which stocks rose 30% and bonds rose 5%, the stock weight becomes about 68% and bonds about 32%.
Leaving this alone means holding a portfolio with higher risk than originally intended. Rebalancing corrects this drift to maintain your intended risk level.
Methods of Rebalancing
There are broadly two approaches to rebalancing.
Calendar-based: executed regularly every 3 months, 6 months, or 1 year. Simple and easy to automate.
Threshold-based: executed only when the weight deviates 5 percentage points or more from the target. This reduces unnecessary trades and minimizes taxes and fees.
How to actually execute: 1. Buy more of the underweight asset (useful when adding new funds) 2. Sell part of the overweight asset and then buy the underweight asset
Selling may trigger capital gains tax. Tax-aware rebalancing can be more efficient.
The Effects and Costs of Rebalancing
Potential benefits of rebalancing: - Maintaining risk level: prevents the stock weight from becoming too high after a market surge - Mechanical contrarianism: the effect of selling risen assets and buying fallen ones - Psychological control: prevents emotional trading
Costs: - Trading commissions - Capital gains tax (when sale gains occur) - Time and effort
There is no guarantee that rebalancing raises returns over the long run. If a bull market runs long, having sold off stocks may actually be a loss. The heart of rebalancing is risk management rather than maximizing returns.
よくある質問
Q. How often should I rebalance?
Once or twice a year is generally recommended. Doing it too often incurs excessive trading costs and taxes. Doing it too rarely lets the weight drift worsen. Executing only when a threshold (e.g., target weight plus or minus 5 percentage points) is exceeded is also an efficient method.
Q. Is there a way to avoid taxes when rebalancing?
Within tax-advantaged accounts such as an IRP or ISA (Individual Savings Account), there is no immediate taxation when rebalancing, so you can execute it without a tax burden. You can also achieve a rebalancing effect without selling by buying the underweight asset when adding new funds.
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