How drift happens
Say you start with 70% equities and 30% bonds. After a strong year for stocks, your portfolio might naturally drift to 80/20. You haven't done anything wrong — markets moved. But now your risk profile has changed: you own more of the riskier asset class, so a market downturn will hit you harder than you originally planned for.
The mechanics: how to rebalance
Rebalancing involves selling assets that have grown above their target weight and buying those that have fallen below. For example, to move from 80/20 back to 70/30, you sell some equities and buy bonds. In practice, many investors rebalance by directing new contributions into underweight assets rather than selling, which avoids triggering taxable capital gains.
The hidden benefit: systematic buy-low, sell-high
Rebalancing forces you to sell what has risen (and become expensive) and buy what has fallen (and become cheap) — a form of systematic counter-cyclical investing. Over full market cycles, rebalancing has been shown to modestly improve risk-adjusted returns compared to drifting portfolios, even though it may lag pure buy-and-hold in strong, one-directional bull markets.
When not to over-rebalance
Frequent rebalancing in a taxable account generates transaction costs and capital gains taxes that can erode the benefit. Most financial planners recommend rebalancing once or twice a year, or whenever an asset class drifts more than 5 percentage points from its target. In tax-advantaged accounts (ISA, SIPP in the UK; 401k, IRA in the US), rebalance more freely.
"Rebalancing is the only strategy that forces you to buy low and sell high automatically — without requiring any market timing skill."
What this means for you
If you invest in a mix of assets, set a target allocation, write it down, and review it once a year. If any category has drifted more than 5%, bring it back. This single habit — consistently applied — will prevent your portfolio from quietly becoming riskier than you intended, particularly in extended bull markets where equities can dominate if left unchecked.