Rebalancing

Left alone, every portfolio drifts toward whatever performed best. That sounds like a reward and is actually a risk: the allocation you chose for good reasons quietly becomes a different, more concentrated one you never chose. After a long equity run, a “balanced” portfolio is no longer balanced — it just remembers being one.

Rebalancing is the correction, and the institutional insight is how it is done: on a rule, not a feeling. Either by calendar — a fixed date, once or twice a year — or by threshold — act only when a weight drifts more than an agreed distance from target. Both work; what does not work is deciding in the moment, because in the moment the winner always looks like it deserves its overweight.

Note what the rule smuggles in: systematic rebalancing makes you a mild seller into strength and a mild buyer into weakness — the exact reverse of the behaviour gap. Not because you predicted anything, but because arithmetic told you to. The world’s most-watched sovereign fund runs on precisely this logic, written into its mandate; the article below covers what that governance looks like and what a private investor can copy from it.

Practical detail: where new savings are still flowing in, rebalancing can often be done with fresh contributions alone — directing them to the underweight side — avoiding sales and the taxes that follow them.