What Is Portfolio Rebalancing — and When Should You Do It

After a bull run, your equity allocation can silently drift from 60% to 80% without you doing anything — turning a moderate portfolio into an aggressive one. Portfolio rebalancing is the act of buying and selling assets to restore your target allocation after drift has pulled it away.

That is the whole idea. The rest is mechanics — but the mechanics matter.

Why allocation drifts in the first place

When you first invest, you set a target: say, 60% equities and 40% bonds. You are comfortable with the risk profile that mix represents.

Then markets move. Equities rise 30%; bonds stay flat. Without any action, your portfolio is now 68% equities and 32% bonds. You have not made a decision to take on more risk — the market made it for you.

Drift is the name for this gap between your target allocation and your actual allocation. A portfolio left alone long enough during a bull market will end up almost entirely in equities, regardless of what you intended.

What rebalancing actually does

Rebalancing corrects drift by selling the asset class that has grown above its target weight and buying the one that has shrunk below it.

In the example above: sell some equities (they are now 68% vs. your 60% target) and buy bonds (32% vs. your 40% target) until you are back at 60/40.

This has a counterintuitive property: mechanically, rebalancing forces you to sell what has risen and buy what has fallen. Done consistently, it is a structural implementation of "buy low, sell high" — not because you are predicting anything, but because you are systematically trimming the thing that has become expensive relative to your portfolio and adding to the thing that has become cheap.

Three common rebalancing triggers

There is no single right answer for when to rebalance. The two main approaches are:

Calendar rebalancing: check and rebalance on a fixed schedule — quarterly, semi-annually, or annually. Simple, predictable, easy to systemize. The downside is that you might rebalance when drift is tiny (wasting transaction costs) or skip a moment when drift is large.

Threshold rebalancing: rebalance when any asset class drifts more than a set band — say, 5 percentage points — from its target. If your equity target is 60% and equities hit 65%, you rebalance. This is more responsive to markets but requires monitoring.

Combined approach: check on a schedule, but only act if drift exceeds a threshold. Many investors find this the most practical — it avoids unnecessary trades while still catching large drift.

A concrete example

Suppose you start with ₹10,00,000 split 60/40 (₹6,00,000 equities + ₹4,00,000 bonds).

After one year, equities rise 35% and bonds rise 5%:

Your portfolio is now ₹12,30,000 but you are 67/33, not 60/40. To rebalance back:

• Target equity value: 60% × ₹12,30,000 = ₹7,38,000
• Sell ₹8,10,000 − ₹7,38,000 = ₹72,000 of equities
• Buy ₹72,000 of bonds

You are now back at 60/40, holding ₹7,38,000 in equities and ₹4,92,000 in bonds.

The one thing most people get wrong

The most common mistake is not accounting for tax costs. Selling equities to rebalance means realizing capital gains. In a taxable account, that triggers a tax event.

Before selling assets to rebalance, check whether you can:

1. Direct new money (dividends, fresh savings) into the underweight asset class instead of selling.
2. Rebalance inside a tax-advantaged account where gains do not trigger tax immediately.

Often you can reduce or eliminate the tax drag by being thoughtful about how you rebalance, not just whether you rebalance.

Why it matters

Rebalancing is not about earning higher returns — evidence on whether it improves raw returns is mixed. What it consistently does is keep your portfolio's risk profile aligned with what you actually intended.

Without it, every bull market silently makes your portfolio more aggressive. Every crash silently makes it more conservative. You end up with a portfolio shaped by market movements, not by your own risk tolerance and goals.

That is a reasonable definition of losing control of your portfolio — and rebalancing is the simplest way to take it back.

Try this

Open your portfolio and note the current allocation percentages across your main asset classes. Compare them to the allocation you intended when you set it up. If anything has drifted more than 5 percentage points, you have your first rebalancing target.

In JustJot.ai, you can create a note that records your target allocation and paste your current actual allocation next to it — a quick side-by-side you can update each quarter. Pin it to your investing workspace so the check becomes a habit.