Portfolio Rebalancing

Over time, your portfolio drifts from its original allocation as some stocks outperform and others underperform. Rebalancing is the process of bringing your portfolio back to its target allocation.

Why Rebalancing Matters

Suppose you start with a portfolio of 50% stocks and 50% bonds. After a year, your stocks have gained 30% while bonds gained 5%. Your portfolio is now roughly 57% stocks and 43% bonds. You are taking more risk than you originally intended.

On the NSE, this drift can be dramatic. If you started with equal allocations to Safaricom and a smaller stock, and Safaricom doubles while the smaller stock stays flat, Safaricom now dominates your portfolio. You have unintended concentration risk.

Two Approaches to Rebalancing

Calendar rebalancing — Rebalance on a fixed schedule, such as every 6 months or once a year. This is simple and removes emotion from the process. Set a reminder on your phone and review your portfolio allocation twice a year.
Threshold rebalancing — Rebalance whenever an allocation drifts more than 5-10% from its target. For example, if your target for banking stocks is 25% and it grows to 35%, you rebalance. This is more responsive but requires more monitoring.

How to Rebalance

There are two ways to rebalance:

Sell and redistribute — Sell some of the overweight positions and buy underweight ones. This may trigger brokerage fees.
Direct new money — Invest your next monthly contribution into the underweight positions rather than selling. This avoids transaction costs and is generally the better approach for smaller portfolios.

Practical Tips

Do not rebalance too frequently — transaction costs can eat into returns
Use dividends and new contributions to rebalance naturally
Keep a simple target allocation written down so you have a reference point
Review your allocation at least twice a year using Stockr's portfolio view

Portfolio Rebalancing