What is Portfolio Rebalancing and How to Do It — Practical Guide

What is Rebalancing?

Rebalancing is restoring an investment portfolio to its target proportions. If you set 70% stocks / 30% bonds, and after a year a bull market changed it to 80/20, rebalancing means selling some stocks and buying bonds.

Why is Rebalancing Important?

Without rebalancing, your portfolio becomes increasingly risky over time (stocks grow faster). After several years, a "70/30" portfolio might look like "90/10" — and then a bear market comes and you lose much more than planned.

Rebalancing is discipline — it forces you to sell what's getting expensive and buy what's getting cheap. It's counterintuitive, but it works.

Method 1: Calendar Rebalancing

Set a fixed date — e.g., January 1st each year:

1. Check current allocation
2. Compare with target
3. Sell/buy to restore proportions

Pros: simple, predictable, easy to remember. Cons: you might rebalance when deviations are minimal (unnecessary costs).

Frequency: once a year is the gold standard. More often = more transaction and tax costs.

Method 2: Threshold Rebalancing

Rebalance only when allocation deviates by a set amount (e.g., ±5 percentage points):

• Target: 70% stocks / 30% bonds
• Rebalance when: stocks > 75% or < 65%

Pros: responds to real market changes, fewer transactions. Cons: requires monitoring.

Method 3: Cash Flow Rebalancing

Instead of selling, direct new contributions to underweighted asset class:

• Stocks became expensive → new money goes to bonds
• Bonds became expensive → new money goes to stocks

Pros: zero transaction costs, no taxable event. Cons: only works with regular contributions and small deviations.

Practical Example

Portfolio on January 1st:

Target allocation with new amount (109,000 PLN):

• Stocks: 70% × 109,000 = 76,300 PLN
• Bonds: 30% × 109,000 = 32,700 PLN

Action: Sell ETF worth 8,700 PLN, buy bonds worth 8,700 PLN.

Rebalancing Costs

With each transaction you pay:

• Brokerage commission (0.1–0.39% on WSE)
• Spread (bid/ask difference)
• Capital gains tax (19% on profit when selling)

That's why cash flow rebalancing is cheapest — zero costs.

When NOT to Rebalance?

• Deviation < 3 percentage points — not worth it
• Just before tax year end (consider tax consequences)
• In IKE/IKZE accounts — rebalance freely here (no capital gains tax)

Common Mistakes

• ❌ Rebalancing weekly — overtrading
• ❌ Rebalancing "by eye" without checking numbers
• ❌ Forgetting to rebalance for years — portfolio drifts
• ❌ Ignoring tax costs

How Freenance Can Help

Freenance automatically tracks your portfolio allocation and shows deviations from target proportions. You'll see on one screen which asset classes need correction, without manual calculations in spreadsheets.

👉 Monitor portfolio allocation with Freenance — freenance.io