What Is Rebalancing In Investing?

If you are searching what is rebalancing in investing, the short version is this: rebalancing means bringing your investment portfolio back toward the mix you originally intended.

That mix is usually described as target weights. If you decide you want a portfolio to be 70% in one investment and 30% in another, those are your target weights. Over time, market movements can pull the portfolio away from that split. Rebalancing is the act of nudging it back.

Nothing here is financial advice. I am explaining the concept in plain English, not telling you what to buy, sell or hold. Your capital is at risk when investing, and past performance is not a guide to future results.

Quick answer: rebalancing means restoring your target mix

Rebalancing is the process of adjusting a portfolio so it moves back toward its intended allocation.

For example:

• You choose a portfolio split of 80% global shares and 20% bonds
• After market movements, the split becomes 90% global shares and 10% bonds
• Rebalancing means changing the portfolio so it moves back toward 80% and 20%

That could involve selling some of the part that has grown, adding new money to the part that is underweight or using a platform feature that helps manage the split.

The key idea is not prediction. It is not saying “this will go up next” or “that will fall next”. It is simply keeping the portfolio closer to the plan.

What are target weights?

A target weight is the percentage of your portfolio you want assigned to a particular investment.

Imagine a simple two-fund portfolio:

If the portfolio was worth £1,000 in total, the target split would be:

The percentages matter more than the pound amounts, because the total value of the portfolio changes over time.

If Fund A performs strongly and Fund B falls, the portfolio might drift to:

The portfolio is now more heavily exposed to Fund A than originally planned. Rebalancing would mean moving it back closer to 60% and 40%.

A simple rebalancing example

Let’s say I had a beginner portfolio with two parts:

• 70% in a broad global fund
• 30% in a more focused fund

After a strong period for the focused fund, the portfolio might become:

• 55% broad global fund
• 45% focused fund

That does not necessarily mean anything has gone wrong. It just means one part has grown faster than the other.

But the risk profile has changed. A portfolio that was meant to be mostly broad and diversified is now more concentrated than planned.

Rebalancing would mean taking action to move it closer to the original 70% and 30% split.

That action could be:

1. Adding new money to the broad global fund
2. Selling some of the focused fund and buying more of the broad global fund
3. Using platform tools that help bring holdings back toward their target weights

This is the important bit: rebalancing is about restoring the chosen structure, not trying to guess the next winner.

Why portfolios drift over time

Portfolios drift because investments do not all move in the same way.

Some rise faster. Some fall faster. Some barely move for a while. If you own more than one investment, their percentages will naturally change as prices move.

For example, if one investment rises by 30% and another rises by 5%, the first one becomes a larger part of the portfolio. If one falls sharply while another holds steady, the steady one becomes a larger percentage even if you did not touch anything.

This drift can be especially noticeable when a portfolio includes a mix of broad and focused investments.

In my own investing, I have used broad ETFs alongside more tech-focused ETFs. The tech-focused side has had periods where it moved much faster. That can feel exciting when the numbers are green, but it also means the portfolio can become more concentrated than originally intended.

That is where rebalancing becomes useful as a concept. It gives you a way to compare the portfolio you have now with the portfolio you meant to build.

Why investors rebalance

Different investors have different reasons for rebalancing, but the main idea is usually risk control.

To keep risk closer to the original plan

If a higher-risk part of a portfolio grows quickly, it can become a bigger slice of the portfolio than expected.

That might be fine if the investor is comfortable with it. But it might also mean the portfolio is now more volatile than they intended.

Rebalancing helps bring the portfolio back toward the original level of risk.

To stop one holding dominating the portfolio

A portfolio can quietly become dominated by one fund, sector or theme if that area performs well for a long time.

That might not be obvious at first, especially if the overall value is rising. But concentration still matters. A portfolio with 10 holdings can end up behaving like a much narrower portfolio if one area becomes too large.

Rebalancing can reduce that concentration.

To make the portfolio easier to understand

Beginner investing is hard enough without a messy portfolio.

One thing I have learned is that simplicity matters. If I cannot explain why each part of my portfolio is there, I probably need to slow down and simplify.

Rebalancing is one way of keeping the portfolio aligned with a clear structure.

Rebalancing is not the same as market timing

This is a common beginner confusion.

Market timing is trying to move in and out of investments because you think you know what prices will do next.

Rebalancing is different. It starts with a target allocation and asks: “How far has my portfolio drifted from the plan?”

For example, selling part of an investment because it has become too large in your portfolio is not necessarily the same as saying it will fall tomorrow. It may simply mean you do not want that investment to take up such a large percentage of your money.

That said, rebalancing can still have downsides. If you reduce an investment that then keeps rising, you may miss some gains. If you buy more of something that keeps falling, you may feel uncomfortable. Rebalancing is a risk-management tool, not a magic return booster.

How rebalancing can happen

There are a few general ways a portfolio can be rebalanced.

Rebalancing with new contributions

One simple method is to direct new money toward the part of the portfolio that has fallen below its target weight.

For example, if Fund A is meant to be 60% but has dropped to 50%, new contributions could be directed more heavily toward Fund A until the portfolio is closer to target.

This can avoid selling, although it may not be enough if the portfolio has drifted a long way or if new deposits are small compared with the portfolio size.

Rebalancing by selling and buying

Another method is to sell some of the investment that has grown above its target weight and buy more of the investment that is below its target weight.

For example:

• Target: 60% Fund A and 40% Fund B
• Actual: 75% Fund A and 25% Fund B
• Rebalance: reduce Fund A and increase Fund B

This may bring the portfolio closer to target more quickly, but selling can have costs, possible tax consequences and practical platform considerations. The details depend on the account and personal situation, so check the relevant rules before acting.

Rebalancing using platform features

Some platforms include tools that let investors set target percentages. In Trading 212, for example, Pies are built around percentage allocations, which can make the idea easier to visualise.

I write more about that platform here: Trading 212 topics.

That does not mean anyone should use a particular platform or feature. It just means modern apps can make the mechanics of allocation easier to see than a traditional list of holdings.

Do you need a rebalancing schedule?

Some investors check their portfolio at set intervals. Others look at it when allocations move beyond a certain range. Some do very little.

I am deliberately not recommending a schedule here, because the right approach depends on the person, the portfolio, the account type, costs, tax position and how hands-on they want to be.

For beginners, I think the main lesson is simpler than the schedule question:

Know what your intended portfolio split is, then understand that it will drift over time.

Once you understand that, rebalancing makes sense as a concept.

Rebalancing and beginner investors

Rebalancing is one of those investing terms that sounds more technical than it really is.

The beginner version is:

• Decide what mix you are aiming for
• Understand that market movements will change that mix
• Compare the current portfolio with the intended portfolio
• Decide whether anything needs adjusting

The hard part is not the maths. The hard part is behaviour.

When something has gone up a lot, selling any of it can feel wrong. When something has fallen, adding to it can feel uncomfortable. And when the portfolio is green overall, it can be tempting to leave the winner to become a bigger and bigger part of the portfolio.

That is why having a plan matters. Without a plan, every market movement becomes a fresh decision.

If you are still at the stage of learning the basics, I would start with the foundation articles here: investing foundations, the beginner glossary and start here.

A quick note on risk

Rebalancing can help keep a portfolio closer to a chosen allocation, but it does not remove investing risk.

Your investments can fall in value. You could get back less than you put in. A diversified fund can still fall. A portfolio that has been rebalanced can still have a bad year. And an investment that has performed well in the past may not perform well in the future.

So while rebalancing is useful to understand, it is not a guarantee, a shortcut or a substitute for doing your own research.

The plain English definition

Rebalancing in investing means adjusting your portfolio so it moves back toward your chosen target weights.

If one part grows from 20% of your portfolio to 35%, rebalancing is the process of bringing it closer to the percentage you originally intended.

That is it. Not a prediction. Not a guaranteed way to improve returns. Just a way of keeping the portfolio closer to the plan.

For my full site-wide caveat, read the disclaimer.