How to rebalance a portfolio once a year

Rebalancing means putting your portfolio back to the mix you chose, after markets have pushed it somewhere else. If you wanted 80 percent in a global stock fund and 20 percent in a bond fund, a strong year for shares might leave you at 88 and 12. Rebalancing sells a little of what grew and buys a little of what lagged, until the mix is back.

It is maintenance. It is not a new opinion about the market.

Why bother

The mix was a risk decision. Drift quietly changes the decision. After a long rise in shares, you are taking more risk than the calm version of you signed up for. After a fall, you may be taking less, and you may also be tempted to “wait until it recovers” before you buy back — which is how a rule becomes a feeling.

Rebalancing, done on a date you chose earlier, buys the lagging side when it is uncomfortable. That discomfort is the product. If it feels clever, you are probably doing something else.

The original mix comes from your horizon, not from a forecast. Risk and time horizon is the chapter to reread if you no longer remember why the percentages exist. The two-fund sketch is in a simple global ETF portfolio.

A once-a-year method

1. Pick a date that is not your birthday party and not the week you file taxes if that week already frays you. Early January is fine. So is a random Tuesday in May.
2. Write the target mix in percentages that add to 100.
3. On the date, look at the current mix. Ignore what happened in the news that morning.
4. If a holding is more than a few percentage points off — 5 points is a common band — move it back. If it is inside the band, do nothing.
5. Prefer to rebalance with new contributions when you can. Send the monthly amount to the side that is underweight, and you may not need to sell anything.
6. If you do sell, check the tax consequence in the account you are using. Inside some tax shelters there is nothing to file. Outside them, a sale can be a taxable event. This is not tax advice.
7. Write down what you did, in one line, so next year you do not relitigate it.

That is the whole method. It does not need a spreadsheet with conditional formatting, though you may build one. The spreadsheet is not the discipline.

What not to call rebalancing

Selling a fund because you read a worrying essay is not rebalancing. Adding a third fund on rebalancing day, because you are already logged in, is not rebalancing. Moving the target from 80/20 to 50/50 because the year was scary is a new plan. You are allowed a new plan. You should not disguise it as maintenance.

Beginner investing mistakes includes this family of decisions: activity that feels like care.

Costs and the broker

A once-a-year trade in a large ETF is cheap relative to the portfolio, but currency conversion and spreads still exist. Do not rebalance a tiny account every month and donate the balance to the plumbing. Expense ratios are the ongoing cost. Trading costs are the extra you add by fidgeting.

If your mix lives in a Trading 212 Pie, the pie can be set toward target weights, which is a form of rebalancing. Read what Trading 212 Pies are useful for before you assume the default settings match your annual rule. The invite, if you need an account, is this Trading 212 referral link (referral link, opens in a new tab). Use the Invest account. Rebalancing a CFD position is a different activity with different risks, and it is not what this guide describes.

Once a year is often enough because the portfolio’s job is measured in decades. The date is there to protect the mix from you, not to give you a hobby.