Portfolio Rebalancing
Why a portfolio drifts away from its target allocation over time, and how periodically buying and selling brings it back.
Key idea
Rebalancing is risk management, not a return maximizing strategy. You chose your target allocation when you were thinking clearly, rebalancing keeps that decision in force after markets move.
What it is
Most portfolios have a target allocation: the mix of assets you chose to match your goals and risk tolerance, for example 60% stocks and 40% bonds. As markets move, those proportions drift away from the original plan. Rebalancing brings the portfolio back in line, trimming assets that have grown above their target and/or adding to those that have fallen below it.
After a few strong years
Take CHF 10,000 set up as 60% stocks and 40% bonds: CHF 6,000 and CHF 4,000. After a few strong years for stocks, the stocks have grown 75% to CHF 10,500 and the bonds 12.5% to CHF 4,500:
Drifted
- Stocks: 10,500.00 (70%)
- Bonds: 4,500.00 (30%)
Sell CHF 1,500 of stocks
Buy CHF 1,500 of bonds
Rebalanced
- Stocks: 9,000.00 (60%)
- Bonds: 6,000.00 (40%)
The portfolio is now worth CHF 15,000: 70% stocks and 30% bonds instead of 60% and 40%, noticeably riskier than what you signed up for. Selling CHF 1,500 of stocks and buying CHF 1,500 of bonds brings it back to CHF 9,000 and CHF 6,000, 60/40 again. Drift also has a direction: money piles up in whatever has run the hardest, so the portfolio slowly concentrates in the most expensive asset.
How to rebalance
- 1
Calculate targets
Target % × total value. 60% × 15,000 = 9,000 in stocks.
- 2
Find the gaps
Current − target = drift. 10,500 − 9,000 = +1,500 overweight.
- 3
Trade the difference
Sell overweight, buy underweight. Sell 1,500 of stocks, buy bonds.
The cheapest way: use new money
You can often skip selling altogether: direct new contributions to the underweight assets until the weights line up. In the example, adding CHF 2,500 of new money to bonds and nothing to stocks takes the portfolio to CHF 10,500 / 7,000, which is 60/40 of the new CHF 17,500 total.
No sale, no realised gains, no sell-side fees. For anyone in the saving phase, this is usually the best method to reach for.
When to rebalance
Two common methods:
- Calendar: Fixed schedule, e.g. quarterly, once or twice a year. Simple, easy to stick to.
- Threshold: Whenever any weight drifts beyond a set band, e.g. ±5 percentage points. Only reacts to big moves, ignores noise.
Vanguard's research found no optimal rule among reasonable approaches. A simple default is to check once or twice a year and rebalance at a 5-point drift. The rule matters because it removes emotion from the decision.
The honest caveat
Rebalancing isn't free. Every trade can carry a broker fee and a bid–ask spread, and at a Swiss bank stamp duty on both the sale and the purchase. In the example, selling CHF 1,500 of a foreign ETF and buying CHF 1,500 of another costs CHF 2.25 in stamp duty each time, CHF 4.50 in all, before broker fees. In many countries, selling winners in a taxable account also realises capital gains.
That's why it pays to rebalance rarely and to lean on new contributions first.
Swiss note
For Swiss private investors, capital gains are generally tax-free, reducing the tax cost of rebalancing. Trading costs still apply: fees, spreads and stamp duty.
Key takeaways
- —Rebalancing controls risk. It isn't meant to increase returns.
- —Drift is automatic. Left alone, a 60/40 portfolio can slowly become 80/20, with the risk to match.
- —New contributions are the cheapest way to rebalance. No selling required.
- —Having a rule and following it matters more than which rule you pick.