Portfolio rebalancing is the process of returning your portfolio to your target asset allocation after market movements have caused it to drift. It is a critical but often overlooked aspect of portfolio maintenance — keeping your risk level aligned with your intentions.
Why Rebalancing Matters
Over time, higher-performing assets grow to represent a larger share of your portfolio than intended:
Example: You start with 70% shares / 30% bonds. After a three-year bull market in shares, your portfolio has drifted to 85% shares / 15% bonds. You are now taking significantly more risk than originally intended — without having made any conscious decision to do so.
Rebalancing corrects this drift:
- Returns your portfolio to its target risk level
- Forces a degree of disciplined “buy low, sell high” behaviour (selling overweight assets that have grown; buying underweight assets)
- Keeps your investment plan aligned with your goals and risk tolerance
When to Rebalance
There are two main approaches:
1. Calendar rebalancing
Rebalance at set intervals regardless of how much the portfolio has drifted:
- Annually: Most common; low cost; may miss large drifts between reviews
- Semi-annually: More frequent; catches drifts sooner
2. Threshold rebalancing
Rebalance when any asset class drifts more than a set percentage from target:
- Common thresholds: 5% or 10% from target allocation
- More responsive to market moves; fewer pointless rebalancing actions when markets are stable
Many investors combine both: annual review, with threshold-triggered rebalancing between reviews if a major drift occurs.
How to Rebalance — Three Methods
Method 1: Contribution-based rebalancing (most tax-efficient)
Rather than selling overweight assets, direct new contributions entirely into underweight assets until the portfolio returns to target.
Example: VGS has grown from 60% to 70% target; VAS has fallen from 40% to 30%. Instead of selling VGS, invest all new contributions in VAS until the allocation is restored.
Advantage: No CGT triggered. No selling required. Most tax-efficient method. Limitation: Only works if portfolio drift is small relative to new contributions.
Method 2: Dividend/distribution-based rebalancing
Direct dividends and ETF distributions to purchase units in underweight ETFs, rather than using DRP or equal reinvestment.
Advantage: Automatic rebalancing without selling; uses natural income flow.
Method 3: Sell and buy rebalancing (full rebalance)
Sell overweight assets and buy underweight assets to restore target allocation directly.
Advantage: Fastest; achieves exact target allocation immediately. Disadvantage: Triggers CGT on gains in sold assets (unless inside super). Transaction costs.
For most Australians outside super: Methods 1 and 2 should be preferred to avoid triggering CGT events. Method 3 may be necessary when drift is large and new contributions are insufficient to rebalance.
Inside super: No CGT in accumulation or pension phase — Method 3 has no tax disadvantage. Rebalance directly without tax concern.
How Much Drift to Tolerate
A commonly used rule: rebalance when any single asset class drifts more than 5% from its target allocation.
Example: Target 40% VAS / 60% VGS. If VGS grows to 67%+ (7% above 60% target), or VAS falls to 33%- (7% below 40% target), consider rebalancing.
Tolerating 5–10% drift reduces transaction costs and tax events without letting the portfolio become materially misaligned.
Rebalancing in Super
Super accounts offer a significant rebalancing advantage: no CGT. You can rebalance freely within your super account without triggering tax. This makes annual rebalancing easy and cost-free.
Most super funds allow switching between investment options online — check your fund’s website or app for the investment switch function.
Automatic Rebalancing
Some platforms automatically rebalance:
- Micro-investing apps (Raiz, Spaceship): Automatically rebalance to target portfolios
- Diversified ETFs (VDHG, VDGR): Rebalance internally — buying a single diversified ETF removes rebalancing responsibility
- Robo-advisers (Stockspot, Clover): Automatically rebalance for a management fee
If you use a single diversified ETF (VDHG) rather than individual ETFs, rebalancing is handled by the fund manager — simplifying management significantly.
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Frequently Asked Questions
How often should I rebalance my investment portfolio in Australia? Annual rebalancing is sufficient for most investors. If markets are volatile and your portfolio drifts significantly, a threshold-based trigger (5% from target) is more responsive. Over-rebalancing (monthly) increases costs without improving outcomes.
Does rebalancing trigger capital gains tax in Australia? Selling overweight assets outside of super does trigger CGT on any capital gains. Hold assets 12+ months before selling to qualify for the 50% CGT discount. Inside super, there is no CGT — rebalance freely. The contribution-based rebalancing method (directing new contributions to underweight assets) avoids CGT entirely.
Do I need to rebalance if I use VDHG or another diversified ETF? No — VDHG, VDGR, and similar diversified ETFs automatically rebalance their internal allocations. One of the key advantages of these all-in-one funds is that rebalancing is handled for you within the fund structure.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.