Investing

The art of Rebalancing Portfolio

Rebalancing your portfolio keeps your investments on track, reduces risk, and helps you stay focused on long-term goals — even when markets get unpredictable.

Team Dhan

21 Jul 2025 — 3 min read

Photo by Imagine Buddy / Unsplash

Every investor starts with a plan — whether it’s building wealth, saving for a milestone, or just growing money over time. But markets don’t always move in straight lines. Your investments can shift, drift, and lose alignment with your goals. That’s where portfolio rebalancing comes in. It’s not just a routine check-up— it’s a smart way to stay on track, minimise risk, and make your money work harder in any market.

What is Portfolio Rebalancing?

Think of portfolio rebalancing like giving your investments a regular health check. Over time, market ups and downs can shift your original mix—say, 60% in stocks and 40% in bonds—without you even realising it. Rebalancing simply means adjusting things back to your planned ratio. It could mean selling a bit of what’s grown too much or buying more of what’s lagged behind. If you skip this step, you might end up taking more risk than you intended—and that could hurt your returns down the line.

The benefits

With ongoing global market fluctuations, interest rate hikes, and economic policy changes in 2025, you must use a disciplined rebalancing plan. Here are some of the benefits of rebalancing:

Benefits	Explanation
Maintains Desired Risk Level	Prevents equity-heavy portfolios from becoming too risky as markets rise.
Locks in Profits	It allows you to sell high-performing assets and secure gains before a downturn.
Buys Low, Sells High	Helps invest in undervalued assets and take profits from overvalued ones.
Aligns with Financial Goals	Keep your portfolio in sync with life goals like retirement, education, or home buying.

How to rebalance investments?

Step 1: Review your current portfolio allocation

Reviewing your asset allocation and comparing it to your target allocation gives you clarity on where adjustments are needed. You must rebalance if your current allocation differs significantly from your intended ratio.

Asset Class	Target Allocation	Current Allocation	Action Needed
Equities	60%	70%	Sell equities
Debt	40%	30%	Buy more debt

Step 2: Decide on a rebalancing strategy

Choose a rebalancing strategy that fits your investment approach. The right strategy helps ensure timely adjustments without emotional interference.

Rebalancing Strategy	Description
Time-based	Rebalance at regular intervals (e.g., every 6 or 12 months)
Threshold-based	Rebalance only when asset allocation deviates beyond a set limit (e.g., 5%)
Hybrid	Combine time-based checks with threshold-based actions

Step 3: Identify which assets to buy or sell

Use your strategy results to decide what to trim or top up. Typically, you’ll sell overperforming assets and buy the underperforming ones to restore your target allocation.

Action Type	What It Means	Example
Sell	Reduce overweight/high-performing assets	Sell Equity if it exceeds 60%
Buy	Add to Underweight/ low-performing assets	Buy debt to reach the 40% target.

Step 4: Avoid emotional decisions

Rebalancing often involves selling winning assets, which can be emotionally difficult. However, emotional investing can increase risk and reduce long-term returns.

Challenge	Reality Check	Solution
Selling high performers	Fear of missing more gains	Focus on a long-term portfolio health
Buying underperformers	It feels risky or illogical	Remember the buy-low, sell-high benefit.

Step 5: Rebalancing retirement portfolio

As you approach retirement, preserving capital becomes more important than aggressive growth. Adjust your allocations accordingly to reduce volatility.

Age Group	Suggested Equity Allocation	Rebalancing Focus
Under 40	60-80%	Growth-focused, high equity exposure
40-60	50-60%	Balanced growth with some stability
60+	20-40%	Capital preservation, lower volatility

When should you rebalance?

Portfolio rebalancing isn’t just about numbers; it’s about timing and controlling your financial plan. Here are key situations when you should consider rebalancing:

Situation	Why It’s Important
After a Market Rally or Crash	Big market moves can disrupt your asset mix. Rebalancing brings it back in line and manages risk.
When Asset Allocation Drifts	If any asset class shifts 5–10% from your target, it’s time to realign.
On a Regular Schedule	Rebalancing every 6 or 12 months keeps your investments on track.
After Major Life Changes	Life events like marriage, retirement, or inheritance may shift your goals; your portfolio should reflect that.

Keep it balanced, always

Rebalancing your portfolio isn’t just some fancy investing trick — it’s a practical way to stay in control. When markets move, your original mix of investments can drift off track. That’s where rebalancing steps in. It helps you manage risk, stay aligned with your long-term goals, and keep emotions out of your money decisions. Whether you're building your wealth or adjusting for retirement, a simple review-and-adjust strategy every few months can make all the difference. Think of it like a regular health check-up — only for your investments.