How does investment portfolio rebalancing work?

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Rebalancing is a routine but important part of managing a diversified investment portfolio, designed to keep your risk level aligned with your original investment plan. **Why portfolios drift out of balance** If you start with a portfolio allocated 60% to shares and 40% to bonds, and shares perform strongly while bonds are flat over the following year, your portfolio might drift to 70% shares and 30% bonds without you making any active decisions -- simply because the shares grew faster. This drift increases your overall risk exposure beyond what you originally intended. **How rebalancing corrects this** Rebalancing involves selling some of the overweight asset (in this example, some shares) and buying more of the underweight asset (bonds) to bring the portfolio back toward its original 60/40 target -- effectively "selling high and buying low" within your existing plan, without trying to predict market movements. **Common rebalancing approaches** Calendar-based rebalancing reviews and adjusts the portfolio on a fixed schedule, such as annually or every six months, regardless of how far it has drifted. Threshold-based rebalancing instead triggers a rebalance whenever an asset class moves a set percentage away from its target (for example, more than five percentage points off target), which can result in more or less frequent rebalancing depending on market conditions. **Rebalancing within tax-efficient wrappers** Rebalancing inside an ISA or pension generally has no tax consequences, since gains within these wrappers are tax-free or tax-deferred -- rebalancing a portfolio held outside a tax wrapper (in a general investment account) can trigger Capital Gains Tax on any assets sold at a profit, which is an important practical difference to consider. **Using new contributions to rebalance** Rather than actively selling overweight assets, some investors rebalance simply by directing new contributions toward whichever asset class has become underweight, gradually bringing the portfolio back into balance over time without needing to sell anything -- this can be a more tax-efficient approach outside a wrapper, since it avoids triggering disposals. **Worked example** An investor's target allocation is 70% shares, 30% bonds. After a strong year for shares, the portfolio drifts to 78% shares, 22% bonds. They sell enough shares and buy enough bonds to return to the 70/30 target, locking in some of the share gains and restoring their intended risk level. **Practical tip** Many multi-asset funds and robo-investment platforms rebalance automatically on your behalf, which can be a simpler option than manually tracking and rebalancing a portfolio of individual holdings yourself.

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