Investment portfolio rebalancing: how to keep the portfolio from drifting away from the plan
This article is intended mainly for people who manage their investment portfolio themselves—for example, through an independent trading account at a bank or investment house—and buy ETFs, index-tracking funds, shares, or bonds themselves.
- Reading time
- 7 minutes
- Complexity
- Intermediate
- Last updated
If all your money is held in a kupat gemel lehashka’a (קופת גמל להשקעהA flexible savings vehicle that allows withdrawal at any time, or receipt of a tax-exempt pension after age 60.; investment provident fund), savings policy, keren hishtalmutA medium-term savings product (six years) that benefits from a tax exemption on investment gains up to the applicable contribution limit. (קרן השתלמות; study fund), or another managed product, the managing financial institution is the one that balances the investments within the tracks you selected. The investment manager makes sure that the portfolio remains consistent with the stated policy of that track.
A self-managed portfolio works completely differently: you choose the precise allocation between shares, bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest., cash, and assets in Israel or abroad—and you are also the one who must make sure that the portfolio does not move too far from the original plan you set.
What is rebalancing?
Rebalancing is a technical action that returns an investment portfolio to the original asset allocation that you planned in advance.
Suppose you decided that your portfolio would consist of 70% shares and 30% bonds. You chose this allocation because it precisely suits your age, financial goals, investment horizon, and the level of risk you are emotionally able to absorb.
But the capital market moves and changes every second. If the stock market rises sharply, the share component naturally grows. If the market suffers declines, that component shrinks. After a certain period, you may discover that your portfolio no longer looks like the one you originally built. Rebalancing is simply the action that brings the portfolio home—to the original allocation.
Suppose you began with a portfolio worth ₪100,000:
A simple numerical example
| Portfolio component | Starting value | Original portfolio percentage | Value after market rises | New portfolio percentage |
|---|---|---|---|---|
| Shares | ₪70,000 | 70% | ₪90,000 | 75% |
| Bonds | ₪30,000 | 30% | ₪30,000 | 25% |
| Total | ₪100,000 | 100% | ₪120,000 | 100% |
On paper, you earned ₪20,000, which feels wonderful. In practice, however, your portfolio became more share-oriented and riskier than you originally planned—it rose to 75% shares.
If you want to stay with the original 70/30 risk level, you have two options: sell a small portion of the shares that grew and buy bonds with the proceeds, or direct your new monthly contributions only to the missing bond component until the ratios returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. to balance.
Why is this so important?
Because without rebalancing, the market changes the risk level in your portfolio without your asking it to do so.
- After a long period of rises: A portfolio that was supposed to be moderate can become very share-heavy and aggressive. It feels wonderful while the market rises, but during the next sharp decline you may discover that the portfolio is far more vulnerable and risky than you can tolerate.
- After sharp market declines: The opposite happens. The share component 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 beginning investors. Let us make a strict distinction:
- Market timing says: "I feel or read in the newspaper that the market is about to crash, so I am rushing to sell everything." This is based on guessing and emotion.
- Rebalancing says: "The mathematics of my portfolio moved away from the target I set, so I am carrying out a technical action to return it to its course." This is based on predetermined rules.
Rebalancing neutralizes fear, excitement, and stressful news headlines and replaces them with an orderly and unemotional work plan.
How do you rebalance the portfolio in practice?
There are two main ways to carry out the balancing in your trading account:
- Rebalancing with new money—the easy and inexpensive way: If you deposit money into the portfolio each month or quarter, direct the new contributions to the component that has been worn down and is missing from the portfolio. In our example, buy only bonds. This is the most convenient way because it does not require selling assets and does not create a tax eventAn action in an investment portfolio (such as selling at a profit) that triggers an immediate tax payment to the state..
- Rebalancing through purchases and sales—the active way: Sell part of the component that grew too much and use the money to buy the missing component. This is more precise, but it may create a tax event—payment of 25% capital-gains tax on the real gainThe actual gain remaining from an investment after deducting the rate of inflation. on the portion sold—as well as purchase and sale commissions or foreign-currency conversion fees.
How often should you check the portfolio?
There is no single rule that suits everyone, but you must have a clear rule in advance.
You can decide to check the portfolio once a year or every six months, or only when one of the components moves outside a defined deviation band—for example, more than 5% or 10% from the original target. If you planned 70% shares and the portfolio is at 72%, there is no reason to rush into action. If it rose 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 rises or declines.
- Do not rebalance because of a forecast or headline from a television commentator.
- Do not rebalance just because a colleague said the market currently looks too expensive.
- Do not rebalance if the deviation is tiny and the technical costs—trading commissions or capital-gains tax—are greater than the benefit.
What happens in managed products?
As stated, in a kupat gemel lehashka’a or savings policy, the internal balancing is carried out automatically by the fund managers according to the track's policy.
But do not be confused: this does not release you from responsibility completely. The institutional body balances the assets within the track, but it does not know whether the track itself still suits your life. If you selected an equity track when you were single and 22, and today the money is intended as equity for a home you will buy in a year, it is your responsibility to move the track itself to a suitable risk level.
The bottom line
The capital market will move, shake, and change your investment portfolio regularly. Rebalancing is your steering wheel—the simple tool that makes sure you remain on course and at the risk level you chose, rather than allowing market storms to manage your future.
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Sources and links
- Investor.gov—Rebalancing — A basic explanation of rebalancing and returning an investment portfolio to a predetermined asset mix.
- FINRA—Asset Allocation and Diversification — Information for investors about asset allocation, diversification, risk management, and portfolio rebalancing.
- Israel Tax Authority—Capital gains from traded securities — General information about reporting and taxation of capital gains from traded 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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