What is portfolio rebalancing?

Investing for your long-term future is something that you might spend decades doing. A key aspect of long-term investing is maintaining the right balance among your assets — it’s crucial for achieving your financial goals.

Portfolio rebalancing is the process of realigning the weightings of your investments to maintain your target asset allocation. Over time, some investments will grow faster than others, causing your portfolio to drift away from your original intentions and risk profile. Without rebalancing, your portfolio may become riskier or more conservative than intended, or hold a mixture of weighted assets that slowly moves away from your initial intent.

Portfolio rebalancing involves buying or selling assets within your portfolio to restore your original or desired allocation. For example, if your target allocation is 60% stocks and 40% bonds, but after a market rally your stocks now make up 70% of your portfolio, you would sell some stocks and buy bonds to return to the classic 60/40 ratio.

The goal is to maintain your preferred risk level and investment strategy. Without rebalancing, your portfolio can become skewed towards riskier or safer assets, which can affect returns and volatility.

How to rebalance your portfolio with us

For those looking rebalance their portfolio, here's a straightforward approach:

1. Learn more about portfolio rebalancing
2. Download the IG Invest app, open a share dealing account online or log in
3. Analyse your portfolio to check what adjustments you want to make
4. Search for your desired assets on our app or web platform
5. Choose how many shares or bonds you’d like to buy
6. Place your deal and monitor your investment

Investors seek to grow their capital through share price appreciation and dividends — if dividends are paid. However, investment values can go down as well as up, past performance does not guarantee future results, and you may get back less than your original investment.

Analysing your portfolio involves identifying the current percentages of each asset class (for example, stocks, bonds, cash and REITs) and comparing these to your target allocation. You then calculate how far your current allocation has drifted from your target. This helps you determine which assets to buy or sell — buying underweight assets and selling overweight assets to bring them to your preferred target.

If you’re buying or selling outside of a SIPP or ISA and inside a GIA (General Investing Account), you might want to consider that tax implications, because each gain may be taxed at your Capital Gains Tax rate. You might also want to consider the impact of any fees, bid-ask spreads and fund expense ratios — rebalancing is healthy but doing it too often can be counterproductive.

We also offer our IG Smart Portfolio service which auto-rebalances your allocations dependent on your risk attitude. 

Why rebalance your portfolio?

There are several key reasons to consider regular portfolio rebalancing:

• Maintaining your risk tolerance — some assets will outperform others and markets will always continue to fluctuate. Without rebalancing, your portfolio might become too risky or too conservative relative to your risk tolerance.
• Staying on track — your asset allocation reflects your time horizon, financial goals and risk appetite. Rebalancing ensures that your investments continue to match these factors over time.
• Enforcing financial discipline — rebalancing enforces a disciplined investment approach. It helps to prevent emotional decisions by encouraging you to ‘sell high, buy low,’ which is a fundamental principle of long-term investing.
• Potentially improving returns— although rebalancing doesn’t guarantee higher returns, it can help to manage volatility and improve risk-adjusted returns over the long term, particularly if it prevents you from trading on emotion.

When should you rebalance?

There is no one-size-fits-all answer, but the most common timings include:

• Periodic rebalancing — rebalancing your portfolio at fixed intervals, such as quarterly, semi-annually or annually. This is the simplest approach and reduces the need for constant monitoring
• Threshold rebalancing — rebalance when your asset allocation drifts beyond a specific tolerance level. For example, if your target stock allocation is 60%, you might rebalance only if it deviates by more than 5%, meaning your stocks allocation is below 55% or above 65%
• Combination approach — some investors use a hybrid strategy, checking periodically but only rebalancing if the allocation drift exceeds their thresholds
• Cash Flow Rebalancing — using dividends from current allocations alongside interest payments to rebalance
• Dynamic rebalancing — adjusting your target allocation itself over time based on market conditions or lifecycle stages (though this does require a serious time commitment)
• It can be easy to fall into the trap of chasing winners or holding losers, so having a specific point in time to rebalance may help you with the emotional discipline required.

Practical rebalancing strategies

It can be hard for some investors to sell outperforming assets when they’re doing well. Instead, it’s quite common to use new capital contributions to your portfolio to buy underweight assets. This strategy also helps to reduce transaction costs and minimises the potential tax consequences outside of tax-advantaged accounts.

Another low-effort option is automatic rebalancing through our IG Smart Portfolio service. We can adjust your portfolio periodically based on your target allocation and risk tolerance, helping you stay on track without requiring manual intervention. This is a popular choice for time-poor investors or those lacking confidence.

It’s helpful to focus on broad asset classes — such as equities, bonds and cash — rather than individual stocks when rebalancing. This simplifies the process and ensures you maintain diversification across your portfolio.

However, you do also want to keep an eye on rebalancing within asset classes. For example, maintaining a healthy distribution between domestic and international equities, stock market sectors, or specific bond types. You might consider higher allocations to bonds when inflation is low and stocks when inflation is high, though again this depends on your personal risk tolerance.

It's also worth considering rebalancing more within tax-advantaged accounts like your SIPP or ISA, as this allows you to adjust your investments without triggering taxable events, making it a more tax-efficient strategy.

Finally, remember that your portfolio and risk tolerance will change as your life changes. Younger investors may tolerate higher growth stock allocations as they have the timeframe to weather any downturns, while older investors often shift toward bonds as they approach retirement. Major life events like buying a first home, getting married or having children also tends to have an effect on risk tolerance, meaning you may want to review your portfolio more regularly.

Of course, there’s also common mistakes to avoid. Rebalancing too frequently can lead to excessive fees and tax implications, so it's better to follow a consistent schedule or set rebalancing thresholds. Ignoring costs is another pitfall; fees (in particular forex costs) can add up.

Additionally, many make the mistake of rebalancing without a clear target allocation. You might want to make sure that your portfolio is built around well-defined investment goals and a realistic risk profile, leaving emotions on the sidelines.

Portfolio rebalancing example

As a reminder, past performance is not an indicator of future returns, and this is not financial advice.

Imagine you start with a portfolio of £100,000 allocated as 60% stocks (£60,000) and 40% bonds (£40,000). Over a year, your stocks perform very well and grow to £80,000, while your bonds remain at £40,000. Your new portfolio value is then £120,000.

• Stocks now represent £80,000 out of the new £120,000 total = 66.7%
• Bonds represent £40,000 out of the new £120,000 total = 33.3%

This is a drift of +6.7% for stocks and -6.7% for bonds relative to your target. If your rebalancing threshold is 5%, this triggers a rebalancing.

To rebalance back to 60/40:

• Target stock value: 60% of £120,000 = £72,000
• Target bond value: 40% of £120,000 = £48,000

Ergo, to meet your target, you would need to sell £8,000 of stocks and buy £8,000 of bonds. This action reduces your risk profile back to your intended level.

Portfolio rebalancing summed up

• Portfolio rebalancing involves adjusting your investment holdings (such as stocks, bonds and cash) back to your target allocation to maintain your intended risk level
• Over time, certain assets may outperform others, causing your portfolio to drift from your goals and risk profile, making regular rebalancing essential
• Rebalancing can be done on a schedule, when asset weights move beyond set thresholds, through new contributions, or automatically using tools like our IG Smart Portfolio service
• You may want to focus on broad asset classes, being mindful of taxes and fees to avoid overly frequent changes