When and how should I rebalance my ETF portfolio?

Every 3 to 6 months, with asymmetric thresholds

Every 3 or 6 months, if equities have risen a lot, sell some of them and bring the cash back to its target level. If they've fallen, buy more of the World ETF with the available cash. Set thresholds — ideally asymmetric — to decide the percentage below which you buy more equities (typically target −5%, to lower your average purchase price) and the percentage above which you sell (typically target +10%, to take advantage of market rallies).

The principle applies just as well to a two-component portfolio — Global Equities + Cash, the simplest strategy for getting started — as to a portfolio with several ETFs (for example split by geography, sector, or a bond component) plus Cash. In that case, periodic rebalancing compares each component against its own individual target: it can involve several buys and sells at once, one for each component that's drifted past its threshold, to bring the whole portfolio back in line with the intended allocation.

Why it works

Rebalancing helps you follow a simple rule: periodically bring the portfolio back to its intended composition, without being guided by the emotions of the moment. In practice, this means buying more of whatever weighs less than intended and trimming whatever has grown beyond target. It isn't about predicting the market — it's about keeping risk under control over time.

Calendar-based or threshold-based: two approaches to rebalancing

There are two main approaches to rebalancing, often combined:

• Calendar-based rebalancing: you check and rebalance the portfolio at fixed intervals (every 3, 6, or 12 months), regardless of how much markets have moved. It's simple to follow and remember, but it can trigger trades even when the drift from target is minimal.
• Threshold-based rebalancing: you check the portfolio on the same regular schedule, but only act if a component has crossed the set threshold (e.g. −5% or +10% from target). This is generally the preferable approach: it cuts down on unnecessary trades, and therefore transaction and tax costs, by only stepping in when the drift is large enough to justify it.

With several ETFs in the portfolio, each component can have its own threshold — not necessarily the same for all of them: a more volatile component (e.g. a sector or emerging-markets ETF) can justify a wider threshold than a more stable one, to avoid rebalancing too often purely because of that instrument's natural volatility.

Selling equities or injecting fresh capital

When a component falls below its buy threshold, there are two ways to bring it back to target: use the Cash already sitting in the portfolio, or inject fresh capital — cash from outside the portfolio, from monthly savings or money you've set aside — to buy at the discounted price without touching the Cash you've already built up. With several ETFs in the portfolio, this choice applies component by component: you might use Cash to rebalance one ETF and fresh capital for another, depending on which takes priority at the time. For more on this trade-off, see the dedicated FAQ How much cash should I hold?

Tax implications: selling can trigger taxable gains

Every time you sell part of an ETF that's grown past its threshold, if the sale realises a gain (the sale price exceeds the purchase price), that gain may be taxable — it depends on which account it sits in. Inside a Stocks & Shares ISA or a SIPP, gains and dividends are sheltered from Capital Gains Tax and dividend tax entirely, so rebalancing has no tax cost. Inside a GIA, however, gains above your annual Capital Gains Tax allowance are taxable, and this is a real cost of rebalancing that adds to transaction fees — worth bearing in mind when setting thresholds, since tighter thresholds trigger more frequent sales, and so more taxable events, even when the drift from target is small.

One way to reduce the tax impact inside a GIA: where possible, rebalance by injecting fresh capital into components below target rather than selling those above it — this avoids realising gains, deferring the tax until you actually sell. This works best when you have regular savings to invest, less well once the portfolio is fully invested and no fresh capital is available.

Common rebalancing mistakes

• Rebalancing too often: checking and acting every week or every month, instead of every 3-6 months, needlessly increases transaction and tax costs without improving the long-term outcome.
• Letting emotions drive the decision: changing your thresholds or delaying a planned rebalance based on the market mood of the moment defeats the whole point of the mechanism, which is precisely to remove emotion from the decision.
• Ignoring transaction and tax costs: thresholds set too tight generate frequent trades that, added up over time, can erode returns more than the rebalancing itself contributes in risk control.
• Forgetting smaller portfolio components: with several ETFs, it's easy to focus only on the main component (e.g. Global Equities) and neglect smaller components that have drifted from their target in the meantime.

Practical checklist

• Set thresholds for each portfolio component, tailored to each one's volatility.
• Fix a regular check-in schedule (e.g. every 3 or 6 months) in your calendar.
• At each check-in, compare the actual allocation with the target for every component.
• Decide, component by component, whether to use existing Cash or fresh capital to rebalance.
• Keep track of any taxable gains from sales inside a GIA, for your tax return.