Portfolio Rebalancing — What It Is and How to Execute It

Definition

Portfolio rebalancing is the process of restoring original, target proportions between asset classes in an investment portfolio. Over time, due to different rates of return, proportions drift apart — rebalancing corrects these deviations.

Why is rebalancing needed?

Example: You start with an 80% stocks / 20% bonds allocation. After a year of bull market, stocks have grown and now make up 90% of your portfolio. Your risk has increased above the intended level.

Rebalancing:

• Controls risk — doesn't allow your portfolio to become too aggressive or conservative
• Enforces discipline — you sell high (what has grown), buy low (what has declined)
• Maintains strategy — Your allocation reflects your goals, not market whims

Rebalancing methods

1. Calendar-based

Rebalancing at set intervals — quarterly, semi-annually, or annually. Simple and predictable.

2. Threshold-based (deviation)

Rebalancing when deviation from target exceeds a set threshold (e.g., ±5 percentage points). Responds to actual market changes.

3. Through contributions

Instead of selling assets, you direct new contributions to the underweighted asset class. Avoids transaction costs and Belka tax.

Rebalancing costs

• Belka tax (19%) — on realized gains when selling
• Brokerage commissions — though increasingly lower, worth considering
• Spread — difference between buy and sell prices

Therefore, rebalancing through contributions is most tax-efficient, especially outside IKE/IKZE accounts.

How often to rebalance?

Research shows that rebalancing once a year or at >5% deviation gives optimal results. Too frequent rebalancing generates unnecessary costs.

How Freenance can help

Freenance tracks your portfolio composition in real-time and shows current deviations from target allocation. This way, you know exactly when and which assets require adjustment.

👉 Monitor your portfolio with Freenance — freenance.io