Portfolio rebalancing
Rebalancing means restoring a portfolio's weights to their initial targets after market movements have caused drift. A disciplined practice but fiscally costly.
Rebalancing is the process of restoring a portfolio's asset weights to their initial target allocations after differentiated market movements have caused drift. For example, a portfolio initially 80% equities / 20% bonds may become 90% / 10% after a strong equity rally — rebalancing means selling some equities and buying bonds to return to 80/20.
Why rebalance?
- Maintain desired risk level: an unrebalanced portfolio drifts toward more risk in bull markets
- Apply a disciplined 'sell high, buy low' approach mechanically
- Respect your long-term asset allocation strategy
- Reduce concentration risk in a single outperforming asset
When to rebalance?
Calendar rebalancing: rebalance at fixed intervals (quarterly, semi-annually or annually). Simple and fiscally predictable. Threshold rebalancing: rebalance when an allocation exceeds a predefined threshold (e.g. ±5% from target). More efficient but requires more active monitoring.
Tax cost of rebalancing
In a standard brokerage account, rebalancing triggers taxable capital gains on each sale. In a PEA or life insurance policy, rebalancing between ETFs generates no taxation as long as money stays inside the wrapper — a major advantage for multi-ETF strategies with periodic rebalancing.
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