Managing money is not only about earning. It is also about investing wisely and taking care of your investments regularly. One important part of this care is rebalancing your investment portfolio. Many people invest once and forget about it, but this can increase risk over time. Rebalancing helps you stay in control and make sure your investments match your goals and comfort level.
In this blog, you will learn:
- What rebalancing means
- Why it is important
- When and how to rebalance your investment portfolio
- Different rebalancing strategies
- A clear example with calculations
- Tips to rebalance safely
Everything is explained in simple language, so even beginners can understand it easily.
What Does Rebalancing Your Investment Portfolio Mean?
When you invest in different assets like stocks, bonds, mutual funds, gold, or real estate, you choose a certain asset allocation. For example:
- 60% in stocks
- 40% in bonds
This allocation is based on your risk tolerance, age, and financial goals.
But with time, asset values change. For example, stocks may increase faster than bonds. This changes your allocation automatically.
So your 60% stocks may become 70% stocks within a few years.
This change is called portfolio drift.
Rebalancing means bringing your portfolio back to your original or desired target allocation. It can be done by:
- Selling some of the assets that increased too much
- Buying more of the assets that reduced or did not grow
- Adding new money to under-weighted assets
Rebalancing keeps your investment plan healthy and balanced.
Why Is Rebalancing Important?
✔ 1. Maintains the Right Risk Level
Every allocation has a level of risk.
For example, 80% in stocks is riskier than 50% in stocks.
If stocks grow too much, your risk increases without your permission. Rebalancing controls this risk.
✔ 2. Helps You “Buy Low and Sell High”
When you rebalance, you:
- Sell assets that have grown a lot (sell high)
- Buy assets that are low or under-valued (buy low)
This is a smart investment habit.
✔ 3. Prevents Over-Dependence on One Asset
If one asset becomes very big in your portfolio, it becomes dangerous because if it falls, your entire portfolio suffers.
Rebalancing spreads the risk.
✔ 4. Keeps You Aligned With Your Goals
Your goals may change with age. Rebalancing helps you adjust and stay on track.
For example:
- At 25, you may want high growth.
- At 50, you may want safety.
Rebalancing helps your investments match your goals at every stage of life.
When Should You Rebalance Your Investment Portfolio?
There are two popular methods:
1. Time-Based Rebalancing
You rebalance after a fixed time period.
Common choices:
- Once a year
- Twice a year
- Every quarter
Most investors prefer once a year, as it keeps things simple.
2. Percentage / Threshold Rebalancing
You rebalance only when your allocation drifts beyond a certain limit.
For example:
- If your stocks move 5% above or below the target, you rebalance.
- If your bonds drop below 35%, you rebalance.
This method is more flexible and is based on market movement.
How to Rebalance Your Investment Portfolio (Step-by-Step)
Here is a simple step-by-step approach:
Step 1: Find Your Current Allocation
Check the current percentage of money in each asset.
Step 2: Compare It With Your Target Allocation
See where the differences are.
Step 3: Identify Overweight and Underweight Assets
- Overweight = increased more than the target
- Underweight = reduced below the target
Step 4: Make Adjustments
You can rebalance by:
- Selling overweight assets
- Buying underweight assets
- Investing fresh money into underweight assets
Step 5: Maintain Records and Review Again Later
This helps you track changes and avoid taking unnecessary risks.
Detailed Example With Calculations
Let’s understand with a clear example.
🔹 Initial Investment: ₹1,00,000
You choose this allocation:
- 60% in stocks → ₹60,000
- 40% in bonds → ₹40,000
🔹 After 2 Years
The market changes:
- Stocks increase by 75%
- Bonds increase by 12%
Let’s calculate the new values:
✔ New value of stocks:
₹60,000 × 1.75 = ₹1,05,000
✔ New value of bonds:
₹40,000 × 1.12 = ₹44,800
✔ New total portfolio value:
₹1,05,000 + ₹44,800 = ₹1,49,800
Now, calculate the new allocation percentages:
✔ Stocks percentage:
₹1,05,000 ÷ ₹1,49,800 × 100 = 70%
✔ Bonds percentage:
₹44,800 ÷ ₹1,49,800 × 100 = 30%
Your portfolio drifted from 60:40 to 70:30.
This means your risk level increased.
🔹 How to Rebalance
You want to bring it back to 60:40.
60% of ₹1,49,800 = ₹89,880
40% of ₹1,49,800 = ₹59,920
So after rebalancing:
- Stocks should be ₹89,880
- Bonds should be ₹59,920
✔ Action Needed
Currently:
- Stocks = ₹1,05,000
- Bonds = ₹44,800
To rebalance:
Sell stocks worth:
₹1,05,000 – ₹89,880 = ₹15,120
Buy bonds worth:
₹59,920 – ₹44,800 = ₹15,120
After this, your portfolio returns to a balanced and safe level.
Different Ways to Rebalance Your Portfolio
1. Rebalance by Selling and Buying
You sell the assets that grew too much and buy the ones that fell.
2. Rebalance Using New Investment
If you invest monthly or yearly, you can put extra money into the underweight asset instead of selling anything.
This reduces tax and transaction costs.
3. Rebalance by Using Dividends
If your investments give dividends or interest, you can reinvest that amount in underweight assets.
4. Rebalance by Stopping Investment in Overweight Assets
Sometimes you can stop investing in the asset that has grown too much and invest only in the underweight one.
This slowly brings balance.
Things to Consider Before Rebalancing
1. Taxes
If you sell investments outside tax-free or tax-sheltered accounts, you may pay tax on profits.
2. Transaction Costs
Some platforms charge fees. Consider this before rebalancing.
3. Market Conditions
Do not rebalance during extreme market panic unless necessary.
4. Your Age and Goals
Younger investors may choose more stocks.
Older investors may prefer safer assets.
Your target allocation should match your life stage.
Benefits of Rebalancing
- Helps reduce risk
- Gives stability
- Prevents emotional decisions
- Supports long-term growth
- Protects you from sudden market falls
- Makes investing more disciplined
- Ensures your portfolio matches your goals
Common Mistakes People Make While Rebalancing
❌ 1. Rebalancing too often
This increases cost and stress.
❌ 2. Rebalancing during emotional moments
Always stay calm and plan-based.
❌ 3. Ignoring the tax impact
Taxes can reduce your actual gain.
❌ 4. Forgetting to review goals
Your target allocation should reflect your present life, not your past life.
Also Read: How to Start Investing With Little Money?
Conclusion
Rebalancing your investment portfolio is not difficult. It simply means checking your asset allocation regularly and updating it to match your goals, risk level, and life changes. Markets move up and down all the time, so your portfolio also moves. Without rebalancing, you may end up taking more risk than you want.
By following a simple system — like rebalancing once a year or when allocation moves too far — you can protect your investments and grow your money in a disciplined way. The example and calculations in this blog show how small changes in the market can shift your entire portfolio, and how rebalancing can easily bring it back on track.
A balanced portfolio is a healthy portfolio, and rebalancing is the medicine that keeps it strong.
