Strategies/ Deep Dive
Strategies · Deep Dive 6 min read

Rebalancing a Portfolio

Why a Portfolio Doesn't Stay Put on Its Own

Once you pick a target mix — say 60% stocks and 40% bonds — that ratio doesn't hold still. If stocks grow faster than bonds (which they usually do over time), stocks slowly become a bigger and bigger slice of your portfolio than you originally intended, without you doing anything at all. Rebalancing just means occasionally selling a bit of whatever's grown to be oversized, and buying more of whatever's now undersized, to get back to the original target.

  • Why it matters. A portfolio that's silently drifted to 70% stocks is riskier than the 60% you originally chose — even though you never actively decided to take on more risk.
  • What it forces you to do. Sell high, buy low — automatically, without needing to predict anything, since you're always trimming whatever just grew the most.
  • How often. Commonly done once a year, or whenever a portfolio drifts more than a few percentage points from its target — not something that needs constant attention.
Example

Say you start with AED 100,000 split 60/40 — AED 60,000 in stocks, AED 40,000 in bonds. Over the next year, stocks have a strong run and grow 50%, while bonds grow a modest 5%. Stocks are now worth AED 90,000, and bonds are worth AED 42,000 — a new total of AED 132,000, but the split has drifted to about 68% stocks and 32% bonds, riskier than you intended. Rebalancing means selling AED 10,800 worth of stocks and moving it into bonds, landing back at the 60/40 target on the new AED 132,000 total: AED 79,200 in stocks and AED 52,800 in bonds.

The Discipline Part

Rebalancing can feel counterintuitive — you're selling the thing that's doing well and buying more of the thing that isn't. That's exactly the point. It keeps your risk level matched to what you originally decided was right for you, rather than letting whichever asset happens to be having a good run quietly take over your entire portfolio.

The Short Version

Periodically nudging your portfolio back to its original target mix, after growth causes it to drift away on its own.