What is rebalancing?
What you'll learn
Understand what rebalancing is and how it keeps your chosen investment mix on track.
Rebalancing means bringing your portfolio back to the mix you chose. If you picked a 60% stocks and 40% bonds split, a strong run in stocks might push it to 70/30. Rebalancing trims the part that has grown too big and tops up the part that has shrunk, so your risk stays where you intended.
Why your mix drifts
Markets do not move in step. When stocks have a good year, they grow to a larger slice of your pot than you planned, which quietly raises your risk without you choosing it.
| Stage | Stocks | Bonds | What happened |
|---|---|---|---|
| Your target | 60% | 40% | The mix you chose |
| After a strong run | 70% | 30% | Stocks outgrew bonds |
| After rebalancing | 60% | 40% | Reset to target |
How people do it
- On a schedule: check once or twice a year and reset.
- By threshold: act only when the mix drifts past a set band, say 5 or 10 points.
- With new money: direct fresh contributions into the underweight asset, nudging it back without selling.
Rebalancing has a quiet discipline to it: it makes you sell a little of what has done well and buy a little of what has lagged. That feels backwards, but it keeps your risk steady rather than letting a hot run leave you over-exposed before a fall.
Watch the costs: selling can mean dealing fees, and outside a tax wrapper, possible tax on gains. Inside an ISA there is no UK tax on the switches.
Key takeaways
- Rebalancing restores your portfolio to its chosen mix.
- Mixes drift because some assets grow faster than others.
- You can rebalance on a schedule, by threshold, or with new contributions.
- Mind dealing costs and tax; inside an ISA there is no UK tax on switches.
Illustrative only: a made-up example showing a 60% stock target drifting to 70% after a strong run, then being reset to 60%. Real drift varies. Not a forecast or a recommended target.
Frequently asked questions
How often should I rebalance?
There is no single rule. Many people check once or twice a year, or when their mix drifts past a set threshold such as five or ten percentage points. The aim is discipline, not constant tinkering.
Does rebalancing cost anything?
It can. Selling may trigger dealing fees and, outside a tax wrapper like an ISA, possible tax on gains. Inside an ISA there is no UK tax to worry about, which is one reason wrappers are handy.
Can I rebalance without selling?
Often, yes. Directing new monthly contributions into the underweight asset nudges the mix back over time, avoiding sales and their costs.
General information, not financial advice. The value of investments can fall as well as rise, and figures and rules can change; check the current position before acting.