How and When to Rebalance Your Portfolio

Portfolio rebalancing is the process of realigning the weightings of your assets back to your original target allocation after market movements have shifted them. Most investors should rebalance at least once a year, or whenever any asset class drifts more than 5–10% from its target. For Australian investors, this typically means selling outperforming assets and buying underperforming ones — which feels counterintuitive but is exactly the discipline that protects long-term returns.

General information only. This article does not constitute financial advice. Consider your own circumstances before making investment decisions.

Why Your Portfolio Drifts in the First Place

Say you start with a target allocation of 60% equities and 40% bonds. After a strong ASX run — like the 18.2% return the ASX 200 delivered in 2023 — your equities portion might have ballooned to 70% or more without you touching a thing. That’s not a deliberate decision to take on more risk; that’s the market making it for you. Rebalancing corrects the drift before a downturn punishes you harder than your original plan intended.

The same logic applies to diversified ETF portfolios. If you hold a mix of Australian shares (e.g. VAS), global shares (VGS), and bonds (VAF), each will move at different speeds. Without periodic adjustment, what started as a moderate-risk portfolio can quietly become an aggressive one.

Two Rebalancing Strategies: Calendar vs. Threshold

There are two practical approaches most investors use:

Calendar rebalancing means you review and adjust on a fixed schedule — typically once or twice a year. It is simple, takes about 30 minutes, and removes the temptation to time the market. Annual is usually sufficient for a self-managed portfolio; most superannuation funds rebalance quarterly.

Threshold rebalancing means you only act when an asset class drifts beyond a set band — commonly 5% from its target. Research from Vanguard suggests that a 5% threshold strikes the right balance between maintaining your intended risk level and minimising transaction costs and tax events.

Many experienced investors combine both: review annually, but act immediately if any holding drifts more than 5–10% from target.

The Tax Reality for Australian Investors

Here is where local investors need to pay close attention. Selling appreciated assets to rebalance triggers a capital gains tax (CGT) event. If you have held the asset for more than 12 months, the 50% CGT discount applies — but you will still owe tax on half the gain at your marginal rate.

A smarter approach is to rebalance using new contributions first. If your equities are overweight, direct your next $5,000 or $10,000 into bonds or cash rather than selling shares. For investors in accumulation phase who are still adding money regularly, this approach can handle most drift without triggering any CGT at all.

Inside superannuation — particularly an SMSF or a fund with a direct investment option — rebalancing is considerably more attractive. Earnings are taxed at just 15% in accumulation phase, so the CGT drag is significantly lower than in a personal brokerage account.

When Rebalancing Is Not Worth the Effort

Rebalancing has real costs: brokerage fees, potential CGT, and the psychological effort of selling winners. For very small portfolios — under roughly $20,000 — frequent rebalancing can erode returns more than the drift itself.

If your portfolio is held in a single diversified fund like VDHG or Betashares’ DHHF, the fund manager rebalances internally. You are already covered. The same applies to most lifecycle super options. You do not need to rebalance what is already being rebalanced for you.

What to Do Right Now

If you have not reviewed your allocation in more than 12 months, open your broker or superannuation portal and pull up your current holdings. Calculate the percentage each asset class represents today versus your original target. If anything is off by more than 5%, it is time to act — either by redirecting contributions or by trimming the overweight position.

Tools like Sharesight (free tier covers up to 10 holdings) can track allocation drift automatically and flag when you are outside your target bands, saving you the manual maths.

Frequently Asked Questions

How often should I rebalance my investment portfolio?

Once a year is a sensible minimum for most investors. A more dynamic approach is to rebalance whenever any single asset class drifts more than 5–10% from its target allocation, regardless of the calendar date.

Does rebalancing hurt long-term returns?

Done too frequently, yes — brokerage and tax costs accumulate quickly. Done sensibly at an annual cadence or a 5% threshold, research consistently shows rebalancing improves risk-adjusted returns by keeping your portfolio within its intended risk profile over the long run.

Can I rebalance inside my super without a tax hit?

Yes. Most retail and industry super funds allow you to switch between investment options without triggering a personal CGT event. SMSF investors have full control and can rebalance at any time, with gains taxed at a maximum of 15% in accumulation phase — far lower than most investors’ personal marginal rates.