Every investment portfolio starts with an intended allocation — perhaps 70% global equities and 30% bonds, or 60% equities, 20% bonds, and 20% alternatives. Within a few months, market movements will begin to push that allocation away from its target. A bull run in equities might push the equity weighting to 80% or beyond. A bond market rally might skew fixed income exposure beyond its intended share.
Rebalancing is the process of returning the portfolio to its target allocation — selling what has grown to above its target weight and buying what has fallen below. It is one of the most underappreciated disciplines in long-term investing: not glamorous, not exciting, but consistently valuable.
This article examines the evidence on rebalancing, the different methods available, the practical considerations for internationally mobile investors, and how to rebalance tax-efficiently.
Why Rebalancing Matters
An unrebalanced portfolio systematically takes on more risk over time.
When equities outperform bonds — as they typically do over long periods — an unmanaged portfolio becomes progressively more equity-heavy. A 60/40 equity/bond portfolio after five years of strong equity returns might drift to 75/25 or 80/20. The investor now holds more risk than intended, and their portfolio is more vulnerable to a significant equity drawdown.
When equity markets fall — as they will periodically and sometimes severely — the portfolio suffers larger losses than the investor's intended risk profile contemplated. For investors who depend on their portfolio for income or have a specific time horizon, this can be consequential.
Rebalancing also enforces a systematic "buy low, sell high" discipline. By selling assets that have risen to above their target weight and buying assets that have fallen below it, rebalancing ensures you are consistently reducing exposure to what is expensive and adding to what is cheap — the opposite of performance chasing.
The Evidence on Rebalancing Returns
Does rebalancing improve returns? The evidence is nuanced.
In trending markets — where one asset class strongly outperforms over a long period — rebalancing reduces returns compared to a buy-and-hold approach, because you are systematically selling the winner. During the US equity bull market of 2009–2021, for example, a portfolio that never rebalanced out of US equities significantly outperformed one that rebalanced annually.
In mean-reverting markets — where asset class returns fluctuate around a long-term average — rebalancing improves returns by systematically buying the dips and selling the rallies.
Over very long periods combining multiple market regimes, the evidence suggests rebalancing modestly improves risk-adjusted returns compared to buy-and-hold, primarily through the reduction in portfolio risk. Vanguard research suggests the return benefit from rebalancing is approximately 0.1–0.4% annually for typical balanced portfolios — small but real.
The more important benefit is the risk management function. Rebalancing ensures the portfolio consistently reflects the investor's intended risk profile rather than drifting towards increasing equity concentration over time.
Rebalancing Methods: Calendar vs Threshold
Two broad approaches to rebalancing timing:
Calendar Rebalancing
Rebalance on a fixed schedule — annually, semi-annually, or quarterly — regardless of how far the portfolio has drifted.
Advantages: Simple to implement, predictable, easy to automate, does not require monitoring of portfolio weights between review dates.
Disadvantages: May rebalance when drift is trivial (wasted transaction costs) or fail to rebalance promptly when drift is extreme (missing the risk management benefit).
Annual calendar rebalancing is the most common choice for individual investors. Research suggests that rebalancing more frequently than annually rarely improves outcomes materially and incurs higher transaction costs.
Threshold (Tolerance Band) Rebalancing
Rebalance only when an asset class drifts beyond a defined tolerance band around its target weight. For example, rebalance when any asset class deviates more than 5 percentage points from its target.
A 60/40 portfolio with a 5% tolerance band would trigger rebalancing only when equities exceed 65% or fall below 55%.
Advantages: Ensures rebalancing when it actually matters (significant drift), avoids unnecessary transaction costs when drift is minor.
Disadvantages: Requires ongoing monitoring of portfolio weights, which some investors find burdensome.
The hybrid approach: Combine calendar and threshold — review quarterly, rebalance only if any allocation has drifted beyond a threshold (e.g., 5 percentage points). This reduces transaction costs compared to pure calendar rebalancing while ensuring the portfolio does not drift unnoticed.
Research by Vanguard suggests that 5-percentage-point tolerance bands and annual calendar rebalancing produce similar long-term outcomes. The hybrid approach is often cited as offering the best balance of simplicity and efficiency.
Transaction Costs and Rebalancing
Each rebalancing trade incurs costs: bid-ask spreads, brokerage commissions, and potentially stamp duty or other transaction taxes. These costs vary by:
- Platform: Low-cost brokers charge £3–£10 per trade; private banks may charge 0.25–0.5% of the trade value
- ETF liquidity: Thinly traded ETFs have wider spreads; major UCITS ETFs have very tight spreads
- Investment type: UK equity purchases attract 0.5% SDRT (though ETFs are exempt from SDRT on most exchanges)
For small portfolios making frequent small trades, transaction costs can meaningfully erode the benefit of rebalancing. The break-even analysis is: the cost of trading should be less than the expected benefit from rebalancing.
Minimising transaction costs:
- Rebalance using new contributions wherever possible: direct new money into underweight assets rather than selling overweight positions. This achieves rebalancing without selling
- Use platform regular investment features: automatic monthly purchases of underweight assets maintain approximate balance at very low cost
- Batch multiple small rebalancing trades into one annual exercise to minimise trade frequency
Tax-Efficient Rebalancing
For investors outside tax-sheltered accounts, rebalancing by selling appreciated assets triggers capital gains tax. This is the single biggest friction in rebalancing for higher and additional rate taxpayers.
Strategies to reduce tax drag from rebalancing:
Rebalance with new contributions: As noted above, directing new contributions to underweight assets avoids selling and therefore avoids CGT. For investors making regular contributions, this alone may be sufficient to maintain balance.
Rebalance within tax-sheltered accounts first: If you hold your portfolio partly in an ISA (for UK residents), a SIPP, or an offshore bond wrapper, rebalance within the tax-sheltered portion first. Sales inside these wrappers generate no immediate CGT.
Time rebalancing to use CGT annual allowance: The UK CGT annual allowance has been significantly reduced in recent years (£3,000 for 2026–27), but using it each year through planned disposals gradually reduces embedded gains.
Tax-loss harvesting: If some positions have fallen in value, selling them at a loss and immediately reinvesting in a similar (not identical) asset can offset gains elsewhere in the portfolio, allowing rebalancing without a net CGT bill.
Use income to rebalance: Dividends and interest from distributing funds can be directed towards underweight assets rather than reinvested proportionally. This rebalances gently without triggering disposals.
How Often Should You Actually Rebalance?
The research broadly supports:
- Annual calendar rebalancing is appropriate for most investors and sufficiently frequent to maintain target allocations
- Semi-annual rebalancing for investors with more volatile portfolios or specific risk management requirements
- Quarterly or monthly rebalancing is rarely justified by the evidence and generates unnecessary transaction costs
- Threshold rebalancing at 5% bands is academically supported as an efficient alternative
For international investors managing portfolios across multiple platforms and jurisdictions, simplicity has additional value. Annual rebalancing — perhaps timed to coincide with the annual portfolio review — is administratively manageable and evidence-based.
Rebalancing Across Multiple Accounts
Many international investors hold assets across multiple accounts: an ISA from their UK days, an international brokerage account in Dubai, a pension plan, and cash savings. The total asset allocation should be considered across all accounts, not managed separately.
Practical approach for multi-account rebalancing:
- Aggregate all investment holdings into a single view (spreadsheet or wealth management software)
- Calculate the total portfolio allocation across all accounts
- Identify the net rebalancing required
- Execute rebalancing preferentially in tax-sheltered accounts (pensions, ISAs, offshore bonds)
- Use new contributions and income to rebalance taxable accounts before selling
Maintaining a single total portfolio view is the starting point. Investors without this view often inadvertently hold very different allocations in different accounts, resulting in a consolidated position far from their intended target.
Rebalancing During Market Crises
The discipline of rebalancing during market falls is psychologically demanding. When equity markets fall 30%, rebalancing requires buying equities — the asset class that has fallen significantly and feels most dangerous. This is the correct action according to the rebalancing logic (equities are now underweight and likely cheap), but it runs entirely counter to the emotional impulse to avoid falling markets.
Research confirms that investors who maintain rebalancing discipline during market falls significantly outperform those who pause or abandon it. The 2020 COVID crash illustrated this: investors who rebalanced into equities during the March 2020 fall benefited substantially from the subsequent recovery.
Automating the rebalancing decision — whether through a rules-based trigger or by delegating to a discretionary manager — removes the emotional barrier. If you know in advance that you will rebalance when equities fall 10%, you do not have to make a discretionary decision in the middle of a crisis.
Compliance Caveats
All investments can fall in value as well as rise, and you may receive back less than you invest. Rebalancing involves selling investments, which may trigger tax liabilities. Tax rules vary by jurisdiction and individual circumstances. The rebalancing strategies discussed in this article are general in nature and do not constitute personal financial or tax advice. Past evidence on rebalancing outcomes does not guarantee future results.
How Global Investments Can Help
At Global Investments, we build rebalancing disciplines into every client portfolio — with clear target allocations, tolerance bands, and annual review processes. For clients with portfolios spread across multiple jurisdictions, we coordinate rebalancing across accounts to minimise tax friction and transaction costs. Contact us to discuss whether your portfolio has the structure and governance to rebalance effectively when it matters most.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.