Rebalancing is the periodic process of returning your portfolio to its original allocation. If you started with 70% stocks and 30% bonds, and stocks have risen faster, you might be sitting at 80/20. Rebalancing brings it back to 70/30.
Why rebalance?
Without rebalancing, your portfolio gradually shifts towards the best-performing asset class. That sounds positive, but it also means your risk increases without you consciously choosing it.
After a long bull market, your portfolio may be much more heavily weighted in stocks than you originally intended. When the market turns, you take a bigger hit than necessary. Rebalancing prevents you from unknowingly taking on more risk than fits your risk profile.
How does it work?
There are two ways to rebalance:
Selling and buying
Sell a portion of the asset class that has grown too large and buy more of the class that has become too small. Specifically: if stocks have grown from 70% to 80%, you sell 10% of your stocks and buy bonds.
Adjusting through new contributions
Instead of selling, you direct your monthly contribution entirely to the underrepresented class. This is more tax-efficient because you do not need to make a sell transaction, but it takes longer before your portfolio is back in balance.
When to rebalance?
There are two common methods:
- At fixed intervals: once or twice a year, for example on 1 January and 1 July. Simple and disciplined.
- Based on deviation: rebalance when an asset class deviates more than 5 percentage points from your target allocation. This reacts faster to large market movements but requires you to actively monitor your portfolio.
Most studies show that annual rebalancing offers a good balance between results and simplicity. More frequent rebalancing yields barely any extra returns and costs more in transaction fees.
Rebalancing in practice
Suppose your target allocation is:
- 60% stocks (via index ETFs)
- 20% bonds
- 10% crypto
- 10% cash
After a strong year on the stock market, stocks are at 70%, bonds at 15%, crypto at 8% and cash at 7%. You sell a portion of your stocks and buy bonds, crypto and cash until you are back at 60/20/10/10.
That feels counterintuitive: you sell what is performing well and buy what is lagging behind. But that is exactly the point. You sell high and buy low, systematically and without emotion.
Rebalancing and taxes
In the Netherlands, your investment portfolio falls under Box 3, where you are taxed on the value as of 1 January. The timing of rebalancing has no direct tax impact, because you are not taxed on realised gains. This makes rebalancing in the Netherlands simpler from a tax perspective than in countries where capital gains tax applies.
Common mistakes
- Never rebalancing. After ten years of a bull market, your allocation can be completely out of balance.
- Rebalancing too often. Monthly rebalancing generates unnecessary transaction costs without any noteworthy benefit.
- Confusing rebalancing with active trading. Rebalancing is restoring your plan, not trying to time the market.
- Only looking at individual positions. Rebalancing is about the allocation between asset classes (stocks vs. bonds vs. crypto), not about which individual stocks you hold.
Rebalancing is one of the few proven methods that reduces your risk without significantly diminishing your expected returns. It is not spectacular and it does not make for great stories at parties. But it works.