Portfolio Rebalancing: Strategy, Benefits, and Examples

Did you know that periodically rebalancing your portfolio can be the key to achieving your financial goals? The market changes constantly: what is a good investment today might imbalance your portfolio tomorrow, exposing you to unforeseen risks.

Portfolio rebalancing is a powerful tool to keep your investments under control, consolidate gains, and ensure your money is always working in your favor. In this article, you will learn what rebalancing is, how to apply it step by step, when to do it, and what its main benefits are. I will also show you a practical example so you can implement it with confidence.

If you are looking to make better financial decisions and protect your wealth, this article is for you. Let’s begin!

TABLE OF CONTENTS
What is portfolio rebalancing?
How is portfolio rebalancing performed?
Situations indicating the need to rebalance
Practical example of rebalancing
Benefits of periodic rebalancing
Final recommendations

What is portfolio rebalancing?

Portfolio rebalancing involves adjusting the asset allocation to return to the initial or desired distribution. Over time, market fluctuations can change the weight of certain assets, creating imbalances and increasing risks.

For example, if your portfolio started with 60% in stocks and 40% in bonds, significant growth in stocks might lead to a distribution of 70% in stocks and only 30% in bonds. This imbalance increases volatility and can steer you away from your original strategy.

The goal of rebalancing is to restore the asset weights in the portfolio, ensuring it remains aligned with your strategy, financial objectives, and risk tolerance.

How is portfolio rebalancing performed?

Step 1: Allocation review

Review the current distribution of your assets and compare it to the target allocation. This will help you identify which assets have deviated from their initial weight.

For example, if your strategy was to have 60% in stocks and 40% in bonds, but now you have 70% in stocks and 30% in bonds, it’s time to adjust it.

Step 2: Asset Adjustment

Once the deviation is identified, make the necessary adjustments:

Sell assets that have grown more than expected (stocks, for example).
Buy assets that have reduced their share (such as bonds or other undervalued assets).

Consider transaction costs and taxes before making any moves.

Tools and Metrics

Use tools that simplify the process, such as:

Spreadsheets: Excel or Google Sheets allow you to easily calculate the current distribution.
Investment platforms: Automated apps to monitor and adjust your portfolio.
Deviation metrics: Calculate the percentage difference between the current weight and the target.

Situations Indicating the Need to Rebalance

🔔 Deviation from target: If an asset exceeds or falls more than 5-10% relative to its original weight.
📈 Drastic market movements: Significant rises or drops in specific sectors or assets.
📊 Cryptocurrency revaluation: Assets like $BTC or $SOL can grow rapidly and unbalance the portfolio.
🗓️ Periodic review: Quarterly, semi-annual, or annual, regardless of performance.
💼 Changes in your goals: Liquidity needs or changes in risk tolerance.
🌍 Global events: Unexpected economic or political crises.

Practical Example of Rebalancing

Initial Portfolio Situation

Let’s imagine a portfolio with an initial total value of 50,000 USD distributed as follows:

Stocks (60%): 30,000 USD
Bonds (30%): 15,000 USD
Cryptocurrencies (10%): 5,000 USD

Changes After a Period of Time

After one year, market fluctuations produce the following results:

Stocks: Grow by 17%, now worth 35,100 USD.
Bonds: Grow by 2%, now worth 15,300 USD.
Cryptocurrencies: Grow by 75%, now worth 8,750 USD.

The total portfolio value is now 59,150 USD, but its distribution is unbalanced:

Stocks: 35,100 USD (≈59.341%)
Bonds: 15,300 USD (≈25.866%)
Cryptocurrencies: 8,750 USD (≈14.793%)

Rebalancing Process

Step 1: Recalculate Values According to the Initial Strategy

To return to the original allocation (60% Stocks, 30% Bonds, 10% Cryptocurrencies), we calculate the new target values based on the current total of 59,150 USD:

Stocks: 60% of 59,150 = 35,490 USD
Bonds: 30% of 59,150 = 17,745 USD
Cryptocurrencies: 10% of 59,150 = 5,915 USD

Step 2: Calculate Reallocation Adjustments

Stocks: 390 USD additional is needed (35,490 – 35,100) to reach the target.
Bonds: 2,445 USD needs to be purchased (17,745 – 15,300) to increase their weight.
Cryptocurrencies: 2,835 USD needs to be sold (8,750 – 5,915) to reduce their weight.

Step 3: Final Result

After adjusting the assets, the portfolio is balanced again:

Stocks: 35,490 USD (60%)
Bonds: 17,745 USD (30%)
Cryptocurrencies: 5,915 USD (10%)

Thus, rebalancing ensures that the portfolio remains aligned with the original strategy, limiting risks to the predefined levels, consolidating gains, and taking advantage of growth opportunities.

Benefits of Periodic Rebalancing

🔒 Risk Control:
Rebalancing prevents an asset or asset class from dominating your portfolio. When an asset grows significantly, its weight in the portfolio increases, which also raises the associated risk. For example, if your stocks rise considerably, your portfolio might become overly exposed to the volatility of stock markets.
By rebalancing, you sell part of the asset with the highest growth to reduce its weight and buy other assets, such as bonds or cash, that provide stability. This maintains the balance between risk and return, aligned with your original tolerance.
📊 Performance Optimization:
Rebalancing allows you to seize opportunities by selling assets that have grown (locking in gains) and reinvesting in undervalued assets. This applies the basic investment rule: “buy low and sell high”.
For example, if cryptocurrencies like Bitcoin or Solana have grown by 75%, you can sell part of them to invest in bonds or stocks that have declined, balancing the portfolio and maximizing long-term performance.
This approach not only ensures more sustainable growth but also allows you to capitalize on opportunities during market corrections.
🧠 Financial Discipline:
Rebalancing fosters discipline and helps you avoid emotional decisions driven by market volatility. It’s common for investors to buy during euphoria (when prices are high) and sell in panic during downturns.
By establishing a regular rebalancing process, you make decisions based on a strategic plan, not emotions. For example, if the stock market drops by 20%, instead of selling in panic, you can see the drop as an opportunity to buy assets at a reduced price.
This reinforces the importance of maintaining a long-term perspective and not being swayed by short-term fluctuations.

Final Recommendations

Rebalancing is not a one-time event; it is a continuous process that strengthens your portfolio over the long term. Here are some recommendations to implement it effectively:

Set a Review Schedule: Decide how often you will review your portfolio. The most common intervals are quarterly, semi-annual, or annual, depending on your risk tolerance and the characteristics of your investments. Regular reviews help you act proactively.
Define Tolerance Limits: Set a deviation threshold for your assets, for example, 5% or 10%. If an asset’s weight exceeds or falls below this limit, you should act to readjust it. This rule will help you avoid significant imbalances.
Adapt Your Strategy to Your Goals: If your financial goals or risk tolerance change, adjust your portfolio allocation. For example, if you are approaching retirement, you might opt for a higher allocation in safer assets such as bonds or fixed-income funds.
Monitor Transaction Costs: Each adjustment involves costs, such as commissions and taxes. Assess whether the benefits of rebalancing outweigh these costs before making moves.
Stay Calm During Volatility: Markets fluctuate, but the key is to avoid impulsive decisions. If you have a well-defined rebalancing plan, stick to your strategy without being influenced by news or other investors’ behavior.

Rebalancing is a tool that helps you keep your portfolio aligned with your strategy, manage risks, and optimize performance. Discipline and consistency are key: set a plan, follow it, and stay focused on your long-term financial goals.