The split drifts on its own
If you decide that a set share of your money goes into stocks and the rest elsewhere, that share will not stay fixed. Whatever rises takes a bigger slice, whatever falls a smaller one. Over time you can end up carrying more or less risk than you chose, without making a single decision.
Start: the split you chose
After stocks rose 30%
After rebalancing
StocksThe rest (cash and fixed income)
A worked exampleYou started with EGP 100,000: 60,000 in stocks and 40,000 in cash and fixed income, so 60% and 40%. Stocks rose 30% to 78,000, the total became 118,000, and stocks now make up about 66%. To return to 60%: 118,000 × 60% = 70,800, so you sell about EGP 7,200 of stocks and move it to the other part. For simplicity we assumed the other part did not change.
There is another way without selling: if you add new money from time to time, put it into the part whose share has shrunk until the split is restored.
When to rebalance
On a scheduleAt a fixed interval you choose, such as every six months or every year, you review and restore the split.
By thresholdsYou set a limit, such as the share drifting more than 5 points from your target, and rebalance when it is crossed.
Watch outEvery sale and purchase has costs, so rebalancing too often eats into your money. Ask your brokerage firm which fees apply to you. Rebalancing does not guarantee a higher return: its aim is to keep risk close to what you chose, and if stocks keep rising, selling some early will lower your gain.
Check your split now
Record your positions in the portfolio and compare each part's share with the split you decided on.
Check yourself
1. You chose 50% stocks. Stocks rose and now make up 58%. What does rebalancing mean here?
The aim is to return to 50%, either by trimming stocks or by growing the other part.
2. What is the main aim of rebalancing?
It restores the split you chose; it guarantees no return.
Summary
- Price moves change your portfolio's split on their own over time.
- Rebalancing restores the chosen split, by selling a part or by directing new money.
- Do it on a schedule or by thresholds, count the costs, and expect no guaranteed higher return.