Portfolio rebalancing: when and how, without selling

What rebalancing is and why your portfolio drifts on its own

When you build a portfolio you decide how much goes into each thing: so much in stocks, so much in bonds, so much in cash. That mix is your target portfolio, and it reflects the risk you are willing to take. The trouble is that the market does not respect your mix: each part rises or falls at its own pace and, after a while, the weights are no longer the ones you chose.

An example. You start with €10,000: €6,000 in a stock fund and €4,000 in a bond fund, a 60/40. A year later stocks are up 40% and bonds are flat. Now you have €8,400 in stocks and €4,000 in bonds, €12,400 in total, and stocks weigh 67.7%. Nobody decided to take more risk, but the risk went up.

And you feel it when the falls come. If stocks then drop 30%, a portfolio with 60% in stocks loses 18%; with 67.7%, it loses 20.3%. In Vanguard's study on rebalancing, a 60/40 portfolio that was never rebalanced between 1926 and 2009 ended up averaging 84.1% in stocks. It returned 9.1% a year against 8.6% for rebalancing it every year, but with a volatility of 14.4% against 11.9%: far more risk than its owner had chosen.

Rebalancing corrects that drift: you sell part of what has grown too much, buy what has fallen behind, or both, until you are back to the starting mix. It is not a way to earn more. In a long bull market, rebalancing usually returns a little less than letting things run, because you sell what is rising most. What you buy is keeping the risk you decided on.

When and how often to rebalance: calendar or bands

There are two ways to decide when. By calendar: you pick a date (once a year, every six months) and on that day you put the portfolio back to its weights, whether it has moved a lot or a little. By bands or thresholds: you set a margin around each weight and act only when something leaves it, whenever that happens. Many investors combine the two: they look at the portfolio on a fixed date and only trade if something is outside its band.

Vanguard studied these rules in «Best practices for portfolio rebalancing» (Jaconetti, Kinniry and Zilbering, 2010, updated in 2015) with data from 1926 to 2009. Its conclusion is that there is no optimal frequency or threshold and that, for most investors, checking the portfolio once or twice a year and rebalancing when something drifts 5 points or more strikes a reasonable balance between risk control and costs. Rebalancing every month did not lower the risk: in its 60/40 portfolio it meant 1,008 rebalancing events in 84 years, against 83 when rebalancing once a year and 28 with a yearly check and a 5 point threshold, with similar volatility (12.1%, 11.9% and 11.8%).

A later Vanguard study, «Rational rebalancing» (2022), reaches a similar idea: the best is to rebalance neither too often, such as every month or quarter, nor too rarely, such as every two years.

A popular version of the bands is the 5/25 rule, spread by the author Larry Swedroe: you rebalance when an asset drifts 5 points from its target weight or 25% of that weight, whichever comes first. For a 60% weight, the band runs from 55% to 65% (25% of 60 would be 15 points, more than 5). For a 10% weight, the band runs from 7.5% to 12.5%, because 25% of 10 is 2.5 points. That way small positions also get a margin in proportion.

In the example, stocks are at 67.7%, outside the 55% to 65% band: time to rebalance. If they were at 63%, under this rule you would leave them alone. What matters is choosing the rule with a cool head and writing it down, so you do not decide in the middle of a crash or a euphoria.

How to rebalance without selling: with your contributions

If you add money every month or every year, you have the cheapest way to rebalance: instead of splitting each contribution by your weights, send all of it to whatever is below its target. You sell nothing, so you pay no selling fees or taxes, and the portfolio gradually moves back into place. Vanguard recommends it explicitly: using contributions, withdrawals, dividends and interest to rebalance helps control risk and trims costs.

In the example, if you add €1,000 and put it all into bonds, you go to €8,400 in stocks and €5,000 in bonds: stocks drop from 67.7% to 62.7%, already inside the band. To get back exactly to 60/40 without selling you would need to add €1,600, because €8,400 has to be 60% of €14,000.

The same works the other way round. If you take money out, take it from what has grown too much. And the dividends or coupons you receive can be reinvested in the part that has fallen behind.

The limit is size: when the drift is large compared with what you contribute, fixing it with contributions alone can take many months. Then you can combine both: add money to what is missing and sell only what you must. The calculator gives you the exact amounts for each option.

Taxes and costs: what rebalancing costs you

Taxes depend on where you live, so here are two common cases. In the United Kingdom, in the 2026/27 tax year, gains on shares above the £3,000 annual exempt amount are taxed at 18% or 24% depending on your income, while switching inside an ISA or a pension triggers no capital gains tax. In the United States, rebalancing inside an IRA or a 401(k) has no tax consequence, and in a taxable account long-term gains are taxed at 0%, 15% or 20%.

So, wherever you can, rebalance first inside your tax-sheltered accounts and with new money, and sell at a gain in a taxable account only when you must. In the example, selling €960 of stocks that cost you about €686 realises a gain of about €274: whether that costs you tax depends on your allowance and your account.

This part applies only to residents of Spain. There, if your stock and bond holdings are investment funds, you can rebalance with a partial fund transfer (traspaso) from the stock fund to the bond fund: the money goes from fund to fund without passing through your account and no tax is due until you finally cash out (article 94 of the Spanish income tax law). ETFs have not qualified since 2022, so selling them is taxed like a sale of shares.

On top of that come the costs of each trade: the broker's or bank's commission, the gap between the buying and selling price and, in some funds, redemption fees. That is why rebalancing with bands and contributions usually costs less than doing it every month by calendar: you trade fewer times and only when needed.

How to do it in MyPortfolio

1. 1

   Group your positions into zones

   In your portfolio's «Plan» tab, assign each position to a zone: the predefined ones (Core, Satellites, Play money and Liquidity) or your own, for example «Stocks» and «Bonds». The portfolio's cash counts in Liquidity.

2. 2

   Create your plan with the target weights

   Enter the target weight of each zone (they have to add up to 100%) and your deviation threshold in points, for example 5. If you add your horizon and the largest fall you can tolerate, the plan goes from «Basic plan» to «Operational».

3. 3

   See how far you have drifted

   For each zone you see the target weight, the actual one, the drift in points and how much money is above or below. The total deviation tells you what share of the portfolio you would have to move: green if it is within your threshold, amber up to twice that and red above.

4. 4

   Trade at your broker and record it

   MyPortfolio does not place buy or sell orders. You make the contribution, the sale or the transfer wherever your money is, record it or import your statement, and the deviation is recalculated.

5. 5

   Follow the weekly notice

   Your portfolio's weekly email tells you whether you are still within your margin or which zone has drifted most, so you do not have to remember to check.

The idea to take away

Rebalancing is keeping the risk you chose. Pick your weights, decide on a simple rule (a yearly check and 5 point bands, or the 5/25 rule), correct with contributions first and sell only when you must. Rebalance inside tax-sheltered accounts where you can and, if you live in Spain and hold funds, use fund transfers instead of selling.

Which weights suit you depends on your horizon and how big a fall you can stand without abandoning the plan, and a calculator cannot decide that. What you can do is stop eyeballing it: with your target weights in MyPortfolio you always know how far you have drifted.

Frequently asked questions