Is it time to rebalance your portfolio?
Undertaking a year-end portfolio review.
The end of the year is a natural moment for reflection. As your life changes your goals may evolve. As markets shift, your portfolio may start to drift away from our plan. If you haven’t checked your asset allocation lately, now might be the time to ask whether your investments are still aligned with what you set out to achieve.
This year was one of paradoxes. Markets have continued to push on despite higher-than-usual valuations, tariff implications, inflationary pressures and mounting concern about the level of US debt.
Ex-US equities experienced a notable rally upon tariff concerns and calls of a decline in American exceptionalism. However, the US also saw strong performance with the S&P 500 delivering around a 15% return which is more than double the ASX 200 with 7% year-to-date.
Often significant market movements might appear in isolation but can have profound effects on your portfolio composition. Naturally without intervention, asset allocation will drift.
What is rebalancing and why it matters
The relative performance of asset classes can reshape your portfolios in ways that no longer reflect your tolerance or investment goals. In bull markets, a run up in equities might leave you with more growth exposure than you planned on. The logic also applies in the reverse.
The process of rebalancing simply involves restoring your portfolio to its intended asset allocation, enforcing the principle of selling high and buying low. Importantly, the practice is about risk control, rather than a prediction on how to enhance returns or time the market.
The chart below demonstrates how asset allocation can change over time without rebalancing. Starting with a 50/50 growth and defensive split across Aussie equities and bonds, we see that over the past decade the allocation would have drifted to around 65/35. If we take global equities, the shift is even more dramatically overweight in equities at 75/25.
Source: Minchin Moore Private Wealth. 2025.
‘Set and forget’ is a term we often throw around but it’s important to note that it doesn’t imply we can be entirely oblivious. Consider an investor who decided on a balanced allocation at age 50 and didn’t revisit it until 60. With retirement on the horizon and a higher need for capital preservation, failing to rebalance would result in them carrying much more risk than intended.
The key takeaway is that we always want portfolio changes to be intentionally driven by the investor, rather than a result of inattention. It may be tempting to let winners ride off into the sunset. In some cases, it’ll pay off handsomely, especially if the winning asset classes continue to perform well. But the process isn’t intended to explicitly improve your returns. Furthermore, it can leave you vulnerable to a portfolio full of yesterday’s winners.
Investing isn’t about guessing what comes next and trying to time markets to tactically allocate at different points in the cycle. Rather it’s more important to make sure your portfolio reflects what you believe in, not just what has performed well lately.
When to rebalance
There are two general practices to rebalancing. The interval approach involves choosing fixed periods (annual, semi-annual, quarterly) to re-align your portfolio back to its intended allocation. This method is considered straightforward as it doesn’t lure investors into reacting to short-term movements.
The other ‘threshold’ approach involves actively monitoring a portfolio and rebalancing once the allocation strays beyond a predefined distance such as 5% over or under. This is a more responsive approach, particularly in volatile markets.
More frequent rebalancing ensures stricter tracking, however, can come at the cost of lower returns, increased turnover and high transaction costs. That is why it’s generally not recommended to rebalance on a weekly or monthly basis. One may also adopt a hybrid method and monitor allocations at set intervals but only rebalance once thresholds are breached.
Notably, research from Vanguard suggests that the specific intervals and thresholds you pick matter less than the discipline of adhering to a consistent approach. An investor’s central focus should be about finding a balance between keeping their portfolio broadly aligned, whilst ensuring not to trade too frequently and incur excessive transaction costs.
How to rebalance
The process can begin at the asset class level (e.g. equities vs bonds) and then extend to portfolios with individual holdings.
Despite convention wisdom calling to sell high and buy low, rebalancing doesn’t necessarily require you to sell out of your investments. It can also be done through redirecting new contributions or adjusting dividend reinvestment.
As a growth-oriented investor with a handful of ETFs, from a psychological standpoint it is difficult to trim down my international equity allocation, given it has consistently outperformed my domestic equity exposure in the past few years. Additionally, I don’t want the tax consequences and brokerage costs associated with transferring between assets.
My solution to this dilemma is to consciously divert future contributions to boost the underweight position over time and avoid triggering capital gains. However, if allocations have drifted significantly, this process can be lengthy, especially for those who dollar-cost-average and don’t have cash reserves to deploy at will. This is an opportunity cost worth considering.
Why sell winners and double down on losers?
Legend Peter Lynch once famously proclaimed that “selling your winners and holding your losers is like cutting the flowers and watering the weeds”. The notion is relevant in this context where rebalancing is the act of doing exactly that. Except one caveat. Lynch’s goal was to deliver excess returns for investors. The average retail investor is likely aiming for something very different.
Rebalancing isn’t a call to invest in something you no longer have conviction in, nor something you’d regard a ‘weed’ in your portfolio. It is re-iterating faith in your original convictions or giving you an opportunity to re-think them.
