Rebalancing: bringing your mix back

You decide, at the outset, roughly how much of your money sits in equity and how much in debt — your asset allocation, a split that matches your goal and how much fall you can live with. Left alone, that split does not stay put. Rebalancing is the periodic act of bringing it back to what you chose. Here is why it drifts, and how to reset it.

Why your mix drifts

Suppose you set out to hold 60% equity and 40% debt. After a strong run in equity, the equity slice grows faster and might become 70% of the pot without you buying a thing. That sounds like good news, and the growth is — but your portfolio is now carrying more risk than you signed up for, because a larger share of it can fall in the next downturn. The reverse happens too: a long flat spell in equity leaves you more conservative than you intended. Drift is silent, and it always pushes your risk away from the level you picked.

What rebalancing does

Rebalancing resets the weights: you trim a little of whatever has grown beyond its target and add to whatever has fallen below it, until the mix is back near the split you chose. Notice what this makes you do — sell a slice of what did well and buy more of what did not. That feels backwards, which is exactly why it is a rule worth having: it takes the decision out of the moment. The aim is not to chase a better return; it is to keep your risk where you decided it should be.

Two ways to do it

There are two mechanisms, and the first is much the cheaper:

• With new money. Point your fresh SIP instalments or a lump sum at the side that is underweight, and let it catch up. Nothing is sold, so this triggers no tax and no exit load. Where your contributions are large enough relative to the pot, this alone can keep the mix in line.
• By moving what you hold. Where new money is not enough, you switch or redeem from the overweight side and buy the underweight one. This works at any size, but selling is a taxable event and may attract an exit load on recently bought units, so it is not free.

When to do it

Rebalancing is a periodic chore, not a daily one. Two simple triggers work: on a fixed schedule, such as once a year on a date you will remember, or whenever the mix drifts past a band you set around your target. Either is fine; what matters is that it is a rule, not a reaction to the day’s headlines. Rebalancing constantly just runs up cost and tax for movements that would have averaged out anyway.

The cost and tax to weigh

Because moving what you hold can realise a capital gain and a possible exit load, rebalance with new contributions first wherever you can, and use selling only for the part that new money cannot fix. If the admin of this feels like a lot, a balanced advantage fund or a hybrid fund rebalances its own internal mix for you — a different way to get the same discipline, inside one scheme, though it gives you less control over the exact split.

The point of it

Rebalancing is maintenance, not prediction. It does not try to buy low and sell high in any clever sense; it simply stops a good run from quietly turning your plan into a riskier one than you agreed to. H2 Investment is a distributor, not an adviser: this explains the mechanism so you can apply it to the split you have chosen, and does not tell you what that split should be.