Why we rebalance and how it works

Here’s what you need to know about rebalancing.

By Caragh Medlicott

Created on: 07/08/2020

Updated: 07/11/2025

Reading time: 9 mins

Investing can be both an exciting and daunting prospect —it presents new opportunities, potential risks, and an entire whirlpool of jargon.

Still, some of the associated finance-speak is more than just meaningless bluster.

Rebalancing investments – for example – is a crucial step for successful investing. That’s why, at Wealthify, we take care of this on behalf of our customers.

If you’re wondering, “what exactly is rebalancing?”, you’re in the right place. In this blog, we’ll break it all down in simple terms and explain how we can take care of rebalancing for you as part of our managed-for-you service.

What is rebalancing?

Rebalancing is the process of adjusting the investments in your portfolio to bring them back in line with your original goals and risk preferences.

Why is it necessary? Well, let’s say you’ve selected a medium-risk investment style with a 50/50 split between shares and bonds. Over time, if shares perform really well, their value might increase significantly, shifting the balance to 80/20 in favour of shares.

This means your portfolio is now higher risk than you initially signed up for as your investments are no longer spread evenly between shares and bonds — which could expose you to more volatility.

This is where rebalancing comes in. It helps restore your portfolio to its original risk level by selling some of the overperforming assets (in this case, shares) and reinvesting in underperforming ones (like bonds). This ensures your portfolio stays in line with your goals and risk tolerance.

It’s worth noting, though, that rebalancing isn’t just about reducing risk.

If your portfolio drifts in the other direction – say, from 60% shares and 40% bonds to 50% shares and 50% bonds – you might actually be taking on less risk than you need to reach your goals. In this case, rebalancing by buying more shares ensures you maintain enough exposure to growth opportunities in the stock market.

Why is rebalancing a portfolio important?

Financial markets are constantly shifting. Sometimes this can be good for investments, sometimes bad, and oftentimes in between. Without regular rebalancing, your portfolio could drift far from its original allocation, potentially increasing your exposure to risk.

These are the key reasons why rebalancing is so important:

Maintains your chosen risk level:
A portfolio that drifts from its original allocation can behave differently than you intended. For example, a medium-risk portfolio that shifts to a higher percentage of stocks might now behave like a high-risk portfolio, with more volatility than you’re comfortable with.
Improves diversification:
Rebalancing ensures your portfolio remains spread across different types of investments, which helps to reduce risk and stabilise returns over time. You can read more about how Wealthify’s expert Investment Team manage customer Plans during times of turbulence in this blog on diversification and direction from our CFO, Jessie Kwok.
Supports your investment goals:
By keeping your portfolio in line with your chosen investment style, rebalancing ensures your investments are working towards achieving your long-term objectives.
Balances regional allocations:
Rebalancing ensures a portfolio stays aligned with regional allocation targets set by you or your fund manager/investment team. As different regions (such as North America, Europe, or Asia) perform unevenly over time, the portfolio can become overexposed to certain areas, increasing risk. By reallocating back to the original regional targets, rebalancing preserves diversification, reduces overconcentration, and keeps the portfolio aligned with the team’s global investment strategy.

When should you rebalance your portfolio?

So now you know why rebalancing is important, it’s time to figure out when you need to do it. There are two main approaches to consider:

Time-based rebalancing: This involves rebalancing your portfolio at regular intervals, such as every three, six, or twelve months. This method is simple, takes the emotion out of the decision, and can often be automated. However, it doesn’t allow for much flexibility and responsiveness should there be sudden changes in the market.
Drift-based rebalancing: This method focuses on rebalancing whenever your portfolio drifts too far from its original allocation. This approach can help you stay on top of market movements with agility — but that also means more monitoring.

Does Wealthify rebalance automatically?

Yes, we do! At Wealthify, we use a hybrid approach that combines both time-based and drift-based rebalancing.

Our expert Investment Team will review your portfolio every three months to ensure it’s still aligned with your chosen investment style. Additionally, we monitor your plan for significant market changes and rebalance when needed, so you can relax without needing to monitor the markets yourself.

When investing with Wealthify, you also get to select from five investment styles — whether opening a Stocks & Shares ISA, Self-Invested Personal Pension, or Junior ISA. This means Investment Plans are monitored and rebalanced should they deviate too far from the threshold of your chosen style.

What are the benefits of rebalancing?

We’ve covered the why and when, so let’s jump into the key benefits associated with rebalancing:

Risk management: Prevents your portfolio from becoming riskier than intended by keeping the allocation aligned with your investment goals.
Improves diversification: Ensures your portfolio spreads its weight across a variety of investments, reducing the impact of poor performance in any one area.
Alignment with goals: Keeps your investments working towards your original goals without unintended changes in risk.
Avoids portfolio drift: Corrects imbalances caused by market movements that could affect your portfolio’s performance.
Focus on long-term strategy: Encourages a disciplined approach to investing and helps you avoid emotional decision-making.

Are there any disadvantages?

While rebalancing offers many benefits, as with anything in life, there are also some potential drawbacks to keep in mind:

May reduce exposure to well-performing assets: Rebalancing often involves selling some of the top-performing investments, which could feel counterintuitive.
Could increase exposure to underperforming assets: Rebalancing may require purchasing more of an asset that hasn’t performed well recently, which can feel risky.
Potential costs: Depending on how you manage your investments, rebalancing could result in transaction fees.
Time and effort: If you’re managing your portfolio yourself, rebalancing can require time, effort, and a solid understanding of your financial goals.

How to do portfolio rebalancing

To rebalance your portfolio, you need to look at assets that have grown in value and consequently become overrepresented in your portfolio. From here, you can then use the proceeds from that overperformance to buy more of the assets that have become underrepresented.

By doing this, you can help bring your portfolio back into alignment. If you’re managing your investments manually, this process will involve regular monitoring, but it can also be handled automatically — with your portfolio’s asset allocation automated so that they adjust to return to their target mix.

Let’s take a look at the pros and cons of manual rebalancing vs automated:

Pros of manual rebalancing:

Customisable and personalised: Manual rebalancing allows you to tailor decisions based on your unique financial goals, insights, or changing market conditions. This flexibility can be advantageous for investors who prefer a hands-on approach.
Greater control: You have full discretion over when and how rebalancing occurs, enabling you to respond to specific situations or market trends without being tied to rigid rules or algorithms.

Cons of manual rebalancing:

Time-consuming: Manual rebalancing requires consistent monitoring of your portfolio, market analysis, and execution of trades, which can take a significant amount of time and effort.
Prone to human error: Emotional biases, miscalculations, or delays in decision-making can sometimes lead to costly mistakes or missed opportunities.

Pros of automated rebalancing:

Efficiency and consistency: Automated rebalancing saves time by continuously monitoring your portfolio and rebalancing when necessary, ensuring a disciplined and regular approach free from emotional influences.
Scalability: Automation makes it easy to manage multiple portfolios or complex asset allocations, which can be especially useful for larger accounts or investors with diversified holdings.

Cons of automated rebalancing:

Lack of flexibility: Automated systems operate based on predefined rules and may not adapt well to unique circumstances or market nuances that sometimes require human judgment.
Overtrading risk: Automation can trigger frequent rebalancing, potentially leading to unnecessary trades that increase transaction costs and tax liabilities in the long run.

Summary

Just like a healthy diet, you want your investments to be aligned with your goals. If you start to skew more towards one food group, you need to rethink your shopping list, and the same ethos goes with investing.

Overall, rebalancing is an essential part of maintaining a healthy and well-diversified investment portfolio. It ensures your investments are on the right track, protects against unnecessary risks, and helps you work towards your long-term goals.

The good news is that if you’re a Wealthify investor, we take care of rebalancing for you, so you can put it out of your mind and get on with more important things. Of course, always remember that as with all investing, your capital is at risk, and you could get back less than you put in. 

Ready to take the hassle out of investing?

Visit our Why Invest with Wealthify page to get started today

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.