Portfolio rebalancing is the process of restoring your investments back to your original target allocation after market movements have caused them to drift. If you target 70% shares and 30% bonds, but shares have outperformed and now represent 80% of your portfolio, rebalancing means selling some shares and buying bonds to return to 70/30. For most Australian investors using single all-in-one ETFs (DHHF, VDHG), this is handled automatically — but multi-ETF portfolio holders need to do it manually.
Why Portfolios Drift
Different asset classes grow at different rates. If your target is 70% shares and 30% bonds, after a year where shares return 20% and bonds return 3%, your portfolio might have drifted to 78% shares and 22% bonds. This means you are now carrying more risk than you intended — more exposure to any future share market decline.
Example:
| Start of year | After 1 year | |
|---|---|---|
| Australian shares (VAS) | $35,000 (35%) | $44,000 (39%) |
| International shares (VGS) | $35,000 (35%) | $42,000 (37%) |
| Bonds (VAF) | $30,000 (30%) | $28,000 (24%) |
| Total | $100,000 | $114,000 |
Your shares have grown from 70% to 76% of the portfolio. To rebalance back to 70/30, you would sell approximately $7,000 of shares and buy $7,000 of bonds.
When to Rebalance
There are two main approaches:
1. Calendar-Based Rebalancing
Rebalance at a fixed interval — typically annually. Simple and avoids excessive trading. An annual review (e.g., each July at the start of the financial year) works well for most Australian investors.
2. Threshold-Based Rebalancing
Rebalance when any asset class drifts more than a set amount from the target (e.g., 5% away). This responds to market moves rather than waiting for an annual date.
Research comparison: Both methods produce similar long-term outcomes. Calendar-based annual rebalancing is simpler and requires less monitoring.
How to Rebalance Your Portfolio
Option 1 — Contribution Rebalancing (Preferred, No CGT)
Rather than selling assets, direct new contributions to the underweight asset class:
- If bonds are under-weight, invest your next $1,000 into bonds
- If Australian shares are under-weight, invest your next contribution into VAS/A200
This avoids triggering CGT and avoids brokerage on a sell transaction. It works best when you are still in the accumulation phase and making regular contributions.
Option 2 — Sell and Buy Rebalancing (CGT Implications)
Sell the over-weight asset and buy the under-weight asset. This triggers a capital gains tax event on any units you sell at a profit. Before rebalancing this way, consider:
- Have you held the units for 12+ months? (50% CGT discount applies)
- What is your marginal tax rate?
- Is the CGT cost worth the rebalancing benefit?
For small drifts (under 5%), the CGT cost of selling and rebalancing may outweigh the risk-reduction benefit. For large drifts (over 10–15%), rebalancing is typically worthwhile.
Rebalancing With Single All-in-One ETFs
If you hold DHHF or VDHG, you do not need to rebalance. These funds rebalance internally — when Australian shares drift above their target weight, the fund manager sells some and buys underweight assets automatically. This is a significant advantage of all-in-one ETFs for set-and-forget investors.
Rebalancing in Superannuation
Super fund investment options are typically rebalanced internally by the fund. However, if you hold multiple investment options in your super (e.g., 70% growth and 30% international), the split may drift and require a manual switch. Most super funds allow you to change your investment option allocation online at no cost — these switches are not CGT events inside super.
Tax Considerations When Rebalancing
| Situation | Tax implication |
|---|---|
| Rebalancing via contributions only | No CGT event |
| Selling units held > 12 months at a profit | 50% CGT discount applies; gain taxed at marginal rate |
| Selling units held < 12 months at a profit | Full capital gain taxed at marginal rate |
| Selling at a loss | Capital loss can offset other capital gains |
| Rebalancing inside super | No CGT — internal fund switches are exempt |
Practical Rebalancing Schedule for Australian ETF Investors
- Once per year (e.g., July): Review actual vs target allocation
- If drift is under 5%: Direct next 2–3 contributions to the underweight asset only
- If drift is 5–10%: Consider selling the most over-weight and buying the most under-weight, weighing CGT implications
- If drift is over 10%: Rebalance with sell/buy, or use annual contributions aggressively to correct
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Frequently Asked Questions
How often should I rebalance my ETF portfolio in Australia? Annual rebalancing is appropriate for most Australian investors. More frequent rebalancing adds complexity and potential CGT costs without proportionally improving outcomes. Many investors with all-in-one ETFs (DHHF, VDHG) do not rebalance at all — the fund does it for them.
Is rebalancing taxable in Australia? Selling any investment at a profit inside a non-super account triggers a CGT event. The gain is included in your assessable income. Assets held for more than 12 months attract a 50% CGT discount. To minimise tax, prefer rebalancing via new contributions rather than sells wherever possible.
Should I rebalance if the market has dropped? A market drop is often a natural rebalancing trigger — shares have fallen relative to their target weight, so you may need to add more shares (or reduce bonds) to restore your target allocation. This counter-intuitive action (buying shares when they’ve just fallen) is exactly what rebalancing requires — and historically it has been a net positive for long-term outcomes.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.