Investment Portfolio Rebalancing: How to Keep Your Portfolio on Track
This article is intended for those who manage their own investment portfolios—for example, through an independent trading account at a bank or investment firm—and personally buy exchange-traded funds (ETFs), index-tracking funds, stocks, or bonds.
- Reading time
- 7 minutes
- Complexity
- Intermediate
- Last updated
If all your money is held in a Kupat Gemel LeHashkaa (קופת גמל להשקעה)A flexible savings vehicle that allows withdrawal at any time, or receipt of a tax-exempt pension after age 60., Polisat Hisachon (פוליסת חיסכון)An investment product managed by insurance companies, offering full liquidity and the ability to switch between investment tracks without creating a taxable event., Keren Hishtalmut (קרן השתלמות)A medium-term savings product (six years) that benefits from a tax exemption on investment gains up to the applicable contribution limit., or another managed product, the financial institution managing it is responsible for rebalancing the investments within the tracks you selected. The investment manager ensures that the portfolio remains aligned with the stated policy of that track.
In a self-managed portfolio, it works completely differently: you choose the exact allocation among stocks, bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest., cash, domestic assets, and foreign assets—and you also need to ensure that the portfolio does not drift too far from the original plan you set.
What is rebalancing?
Rebalancing is a technical action that restores your investment portfolio to the original asset allocation you planned in advance.
Suppose you decided that your portfolio would consist of 70% stocks and 30% bonds. This is the allocation you chose because it precisely suits your age, financial goals, investment horizon, and the level of risk you can emotionally withstand.
But the capital market moves and changes every second. If the stock market experiences sharp gains, the equity portion of the portfolio naturally grows. If the market takes a hit, that portion shrinks. After a certain period, you will find that your investment portfolio no longer looks anything like the portfolio you originally built. Rebalancing is simply the action that brings the portfolio back to its original allocation.
Suppose you began investing with a portfolio worth 100,000 NIS:
A simple numerical example
| Portfolio component | Initial value | Percentage of original portfolio | Value after market gains | Percentage of new portfolio |
|---|---|---|---|---|
| Stocks | 70,000 ₪ | 70% | 90,000 ₪ | 75% |
| Bonds | 30,000 ₪ | 30% | 30,000 ₪ | 25% |
| Total | 100,000 ₪ | 100% | 120,000 ₪ | 100% |
On paper, you have earned 20,000 NIS, and that feels great. But in practice, your portfolio has become more equity-heavy and riskier than you originally planned (it rose to 75% stocks).
If you want to stick to the original risk level of 70/30, you have two options: sell a small portion of the stocks that grew and use the proceeds to buy bonds, or direct your new monthly contributions solely to the underrepresented bond component until the proportions are restored.
Why is this so important?
Because without rebalancing, the market changes your portfolio's risk level without you asking it to.
- After a prolonged bull market: A portfolio that was meant to be moderate may become highly equity-heavy and aggressive. It feels amazing as long as the market rises, but in the next sharp downturn, you may discover that your portfolio is far more vulnerable and risky than you can handle.
- After sharp market declines: The exact opposite happens. The equity portion shrinks, and the portfolio becomes too conservative and hesitant—precisely when the market is low and you are investing for the long term.
Rebalancing is not market timing!
This is one of the most common mistakes among beginner investors. Let's make a clear distinction:
- Market timing means: "I feel/read in the newspaper that the market is about to crash, so I rush to sell everything" (an action based on guesswork and emotion).
- Rebalancing means: "The mathematics of my portfolio has drifted from the target I set, so I take a technical action to put it back on track" (an action based on rules set in advance).
Rebalancing neutralizes fear, excitement, and alarming news headlines, replacing them with an orderly, dispassionate action plan.
How do you rebalance your portfolio in practice?
There are two main ways to rebalance your trading account:
- Rebalancing with new money (the easy and inexpensive way): If you deposit money into your portfolio every month or quarter, simply direct the new deposits to the component that has been "eroded" and is underrepresented in the portfolio (in our example—buy bonds only). This is the most convenient method, as it does not require selling assets and does not create a Taxable eventAn action in an investment portfolio (such as selling at a profit) that triggers an immediate tax payment to the state..
- Rebalancing through buying and selling (the active method): Sell part of the component that has grown excessively, and use the money to buy the component that is missing. This method is more precise, but it may trigger a Taxable event (payment of capital gains tax of 25% on the real gainThe actual gain remaining from an investment after deducting the rate of inflation. from the portion sold), buying and selling commissions, or foreign-currency conversion fees.
How often should you review your portfolio?
There is no single rule that suits everyone, but you must have a clear rule in advance.
You can decide to review the portfolio once a year or every six months, or only when one of the components deviates beyond a certain "deviation band" you set (for example, a deviation of more than 5% or 10% from the original target). If you planned for 70% stocks and the portfolio stands at 72%, there is no reason to rush into action. If it has jumped to 85%, that completely changes the nature of the portfolio and requires intervention.
When should you not rebalance?
- Do not rebalance because of temporary daily, weekly, or monthly market declines or gains.
- Do not rebalance because of a forecast or headline from a financial commentator on television.
- Do not rebalance just because a friend from work said that the market looks "too expensive" to them right now.
- Do not rebalance if the deviation is minimal and the technical costs (trading fees or capital gains tax) exceed the benefit of the action.
And what happens in managed products?
As noted, in a Kupat Gemel LeHashkaa (קופת גמל להשקעה) or Polisat Hisachon (פוליסת חיסכון), internal rebalancing is performed automatically by the fund managers in accordance with the track's policy.
But do not get confused—this does not completely absolve you of responsibility. The institutional body rebalances the assets within the track, but it does not know whether the track itself still suits your life. If you chose an equity track when you were single and 22 years old, and today that money is intended as a down payment for a home you will buy in a year, it is your responsibility to change the track itself to an appropriate risk level.
The bottom line
The capital market will continually move, shake, and change your investment portfolio. Rebalancing is your steering wheel—the simple tool that ensures you stay on course and at the risk level you chose, rather than letting market storms manage your future.
Sources and links
- Investor.gov — Rebalancing — A basic explanation of rebalancing and restoring an investment portfolio to its predetermined asset mix.
- FINRA — Asset Allocation and Diversification — Investor information on asset allocation, diversification, risk management, and investment portfolio rebalancing.
- Israel Tax Authority — Capital Gains from Marketable Securities — General information on reporting and taxation of capital gains from marketable securitiesA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits..
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