Rebalancing a Multi-Asset Portfolio

When to act: calendar or threshold

Two triggers are common, and they answer different questions.

Calendar-based rebalancing reviews the portfolio on a fixed schedule, quarterly or annually. It is simple and it guarantees a check happens. Its weakness is that it ignores what happens between review dates: a crash that pushes stocks from 50% to 35% in February waits until your next scheduled review before you act on it.

Threshold-based rebalancing acts when any class moves more than a set number of points from target, commonly 5. If the target is 50% stocks, you rebalance when stocks exceed 55% or fall below 45%. This responds to actual market moves, and it does not manufacture trades when nothing has drifted.

The practical version is a hybrid: check the allocation monthly, act when drift exceeds the threshold or at the annual review, whichever comes first. That gets the responsiveness of threshold rebalancing with the backstop of a calendar check.

The drift arithmetic is worth doing once. A £100,000 portfolio split 50% stocks and 50% everything else moves a long way after a year in which stocks rise 30% and the rest is flat: the stock half grows to £65,000, the rest stays at £50,000, so stocks are 65,000 of 115,000, about 56.5%. Add a second strong year and the drift compounds. Rebalancing is how you stop a good market from quietly doubling the risk you set out to take.

When we run this against a real portfolio history, the allocation people remember is never the one they end the year with. The drift happens quietly, one good quarter at a time, which is why a written target and a fixed review date matter more than the exact split.

Rebalance with contributions before you sell

The most tax-efficient rebalancing never sells anything. You redirect new contributions toward whatever is underweight until the allocation returns to target. If stocks are overweight at 58% against a 50% target and metals are underweight at 7% against 10%, you put your next several monthly contributions into metals. No sale, no capital gains event, no sell-side fees.

The trade is speed. If contributions are small relative to the portfolio, a large drift takes months to correct. Dividends and other income give a second route: direct stock dividends, savings interest or rental income toward the underweight class instead of reinvesting where it came from. Every income event is a chance to rebalance without a taxable sale.

What selling costs: capital gains tax

For drift that is too large to correct with contributions, you sell the overweight asset, and that can trigger capital gains tax. In the UK the annual exempt amount is £3,000 (2026/27), and the rates on most assets are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers (2026/27). Gains inside an ISA or pension wrapper are outside CGT entirely, which is why rebalancing within those wrappers is free in a way that taxable accounts are not.

The arithmetic matters. Suppose you sell overweight stocks at a £2,000 gain and underweight crypto at a £1,500 loss. The loss offsets the gain, leaving £500 of net gains, which is below the £3,000 exempt amount, so no tax is due. That offset is why losses are not always something to avoid: harvested against a gain, a loss can cancel the whole bill. Use the capital gains tax calculator to run your own figures before you sell, and check the full rules in the UK capital gains tax on investments guide.

Rebalancing is harder across asset classes

A stock and bond portfolio rebalances with two liquid, cheaply traded instruments. A five-class portfolio does not. Stocks and ETFs trade in any amount with tight spreads. Crypto is nearly as liquid for the major coins, though smaller coins carry wider spreads and exchange fees. Savings accounts are instantly transferable unless a notice period applies. Physical metals are genuinely illiquid: selling means finding a dealer, paying shipping and assay, and accepting a price below spot.

Real estate is the extreme case. You cannot sell 5% of a rental property. If property is overweight, your options are to direct new money away from it, sell the whole property, or hold the liquid part of the allocation in a REIT instead. For property and physical metals, contribution-based rebalancing is not a preference, it is the only practical route.

A schedule that works

Check the allocation monthly and note any drift over a few points. Quarterly, direct new contributions and income toward whatever is light. Annually, do the full review: sell and buy if contributions have not corrected the drift, and revisit the target itself, because your income needs and time horizon may have changed. Consistency beats precision: the discipline of acting on the schedule is what removes the temptation to chase last year's winner or panic during a downturn.

CGT figures above are for the 2026/27 tax year, from GOV.UK, capital gains tax on shares and investments. This page explains how rebalancing works; it is not personal advice, and your circumstances decide when and whether to act.