When markets move, your asset allocation drifts. Here's why bringing it back to target is one of the simplest ways to manage risk over time.
Imagine you start with a portfolio that's 60% stocks and 40% bonds — a classic balanced allocation. A year goes by. Stocks have a great year, up 25%. Bonds plod along, up 3%.
What's your allocation now? Roughly 66% stocks, 34% bonds. Without doing anything, your portfolio has become noticeably more aggressive than you intended.
That's portfolio drift — and rebalancing is the fix.
Rebalancing means selling some of what's grown (in our example: stocks) and buying more of what's lagged (bonds), restoring your portfolio to its original target allocation.
This sounds counter-intuitive — you're selling the winners and buying the losers. But it's actually a disciplined, mechanical way to follow the most basic investing rule: buy low, sell high. The asset that's grown is now relatively expensive. The asset that's lagged is now relatively cheap. Rebalancing systematically tilts you back toward whatever's underweight.
1. Risk control. Your original allocation reflected the level of risk you were comfortable with. As markets move, your allocation drifts — and so does your actual risk exposure. Without rebalancing, you can end up with a portfolio far riskier (or far more conservative) than you intended.
2. Discipline through volatility. When markets crash, rebalancing forces you to buy more of the falling asset (when prices are low). When markets boom, rebalancing forces you to take some chips off the table. Without this discipline, most investors end up doing the opposite — buying more of what's hot and abandoning what's down.
3. Long-term return enhancement. Studies suggest rebalancing can add roughly 0.2-0.5% per year to long-term returns compared to a never-rebalanced portfolio, especially across cycles where asset classes diverge significantly.
There's no single right answer, but the research suggests two reasonable approaches:
Calendar-based: Rebalance once a year, regardless of how much the portfolio has drifted. Simple, predictable, easy to schedule.
Threshold-based: Rebalance whenever any asset class drifts more than 5% from its target (so a 60% target becomes a rebalancing trigger when it hits 55% or 65%). More responsive, but requires monitoring.
Studies generally show threshold-based rebalancing slightly outperforms pure calendar-based, but the difference is small. The bigger gain comes from rebalancing at all — versus never rebalancing.
If you're rebalancing manually, every trade has costs: brokerage commissions, bid-ask spreads, and in some jurisdictions, capital gains tax. These costs can eat into the benefit of rebalancing if you do it too frequently or with too-tight thresholds.
At Smartly, rebalancing happens automatically across your portfolio with no trading commissions, no rebalancing fees, and no tax friction (Singapore doesn't tax capital gains). The friction-free environment means we can rebalance whenever your portfolio meaningfully drifts — capturing the full benefit without the costs.
Rebalancing is one of those investing fundamentals that sounds technical but is actually quite simple: keep your portfolio in line with the risk level you originally chose. Do it on a schedule. Don't agonise over the perfect timing. Most importantly, do it consistently.
Or — let an algorithm handle it for you.
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