Imagine starting with 60 per cent in shares and 40 per cent in bond funds. After a couple of good years on the stock market, shares make up 70 per cent. The portfolio has become riskier without you making an active choice. If the stock market falls now, you will be hit harder than you planned.
The same happens within a share portfolio. A share that has risen sharply can end up making up a large part of the portfolio, so the whole result depends on one company.
Why rebalance?
- Control of risk. Rebalancing keeps risk at the level you have chosen.
- Discipline. You sell a little of what has risen most and buy what has done worse. That counters the temptation to chase winners.
- Less concentration. No single share is allowed to grow so large that it dominates the portfolio.
Rebalancing is first and foremost about risk, not about raising returns. In periods when one part of the market rises for a long time, rebalancing can give a lower return than leaving the portfolio alone.
The methods
| Method | How it works | Advantage | Drawback |
|---|---|---|---|
| Fixed dates | Rebalance, for example, once a year | Simple and predictable | May rebalance when it is not needed |
| Threshold | Rebalance when a weight drifts by, for example, five percentage points | Acts only when it matters | Requires you to keep an eye on it |
| New money | Use deposits and dividends to buy what has become too small | No sales, low costs | Works slowly if the portfolio is large |
Many investors combine the methods: they check the portfolio once a year but only rebalance if the drift is large enough, and use new deposits to adjust along the way.
An example
Your target is an equal weight in five shares, 20 per cent each. After a year, one share has risen so much that it makes up 32 per cent, while the others make up 17 per cent each. With a threshold of five percentage points, the limit is reached for the largest share. You can sell part of it and spread the amount across the other four, or use new deposits to buy the other four until the allocation is restored.
Costs and tax
Every trade costs brokerage, and in an ordinary share account a sale at a gain triggers tax. Frequent rebalancing can therefore cost more than it gives.
In a share savings account (ASK) you can sell and buy without triggering tax, as long as the money stays in the account. That makes ASK well suited to portfolios that are rebalanced regularly.
How often?
There is no single right answer, but for most private investors once a year, or when the allocation has drifted a lot, is enough. Rebalancing every month rarely improves results, but means more trades and higher costs.
Rebalancing in AksjeNet
The portfolio analysis in AksjeNet shows how your portfolio is spread across sectors and individual shares, where concentration is greatest, and which positions are dragging it down. The model portfolios on AksjeNet are rebalanced by fixed rules, and you can see every transaction made.
Next steps
- See how the portfolio analysis works
- See how the model portfolios are rebalanced
- Read about diversification