Is Your Portfolio Off Balance? Proven Asset Rebalancing Strategies You Can Use Today (Part 3)

Finding Your Balance: Asset Rebalancing Strategies for the Everyday Investor

When we begin our investment journey, we often spend a lot of time trying to get things right. We carefully select the mix of assets, hoping they will grow and support our goals over time. But markets never move in straight lines. Some assets rise faster than others, and slowly, without us noticing, the balance we started with begins to shift. This shift might look harmless at first, but it can bring in more risk than we are comfortable with or leave us underprepared for our future needs.

Rebalancing is one of those things that quietly holds everything together. It does not promise overnight riches. But it helps us return to our original plan. In a way, it is like tending to a garden. In fact, I had shared in an earlier article how the care and attention a mother gives her plants reminds us that our investments also need regular nurturing. Without that, even the best garden can become wild, and the same happens with our portfolios. (Click here to read Part 1)

I also explored how stories from our own mythology can teach us lessons about balance, discipline and the need to course-correct. These stories are not just inspiring; they help us connect deeper with what can often feel like a dry financial topic. (Click here to read Part 2)

Now, why is this really important? Because unchecked drift can lead to unintended risks. Suppose you started with 60 percent in equity and 40 percent in safer assets. If the market goes through a long bull run, equity might grow to 80 percent of your portfolio. You may feel richer on paper, but your exposure to market risk has increased drastically. If a market correction comes—as it always does, eventually—you might face a much steeper fall than you had bargained for. Regular rebalancing helps avoid this scenario by nudging your portfolio back into shape.

Let us look at some of the most commonly used asset rebalancing strategies that many do-it-yourself investors are exploring today. These approaches are not just meant for experts — even those with smaller portfolios can use them to stay on track with their financial goals

Asset Rebalancing Strategies - Money Vichara

Calendar-Based Rebalancing

This is perhaps the most straightforward way to rebalance a portfolio. You pick a specific interval—say, once every year—and on that date, you realign your investments to the original mix. The calendar, not the market, tells you when to act.

Imagine a portfolio that started with 60 percent in stocks and 40 percent in bonds. Over a year, stocks perform well and grow to form 70 percent of the portfolio. With calendar-based rebalancing, you would trim some of those gains and shift the extra into bonds, even if the market still feels strong. Many investors prefer this approach for its simplicity and discipline. It allows you to step back from daily market noise and focus on long-term planning.

Threshold-Based Rebalancing

Instead of looking at the calendar, this strategy reacts to how much an asset drifts from its target. You set a limit—say, a 5 percent change—and when the actual allocation crosses that line, it is time to rebalance.

Let’s say the plan is 50 percent equity and 50 percent debt. If equities rally and grow to 56 percent of the portfolio, that’s a 6 percent drift—crossing the set threshold. That triggers rebalancing, and some equity is sold to bring the ratio back to 50-50. This method adds flexibility and allows rebalancing only when needed. But it does require more frequent monitoring, and in volatile markets, it could lead to more frequent buying and selling.

Risk Parity Rebalancing

This approach takes a step away from simple percentages and looks instead at risk. The goal here is to balance the overall risk coming from each asset, rather than the amount of money invested.

For example, stocks are typically more volatile than bonds. So even if you invest equal amounts, stocks might bring more risk to the table. Risk parity tries to equalise that, often by investing more in less risky assets to balance the scales. Though originally used by large investment firms, the idea has started to interest more detail-oriented investors who want a smoother ride through market ups and downs. It is more technical, but appealing for those looking beyond basic asset splits.

Age-Based Rebalancing

This is one of the oldest and most instinctive approaches. The thinking here is simple: the younger you are, the more risk you can take. As age increases, the focus shifts to protecting wealth rather than growing it aggressively.

A common rule is “100 minus your age” to decide equity exposure. So, a 30-year-old might hold 70 percent in equity, while a 60-year-old would bring that down to 40 percent. This gradual shift happens naturally over time, often through periodic rebalancing every few years. It aligns well with long-term goals like retirement, especially in places where traditional pension support is limited, and individuals rely more on their own savings.

Cash-Flow Triggered Rebalancing

In this method, you do not rebalance by selling assets, but by adjusting where new investments go. It is particularly useful for those investing regularly, such as through a monthly investment plan.

Suppose your plan is to maintain 60 percent in equity and 40 percent in debt. Over time, equity falls behind. Instead of selling from the debt portion, you simply direct your upcoming investments more toward equity until the balance is restored. This method avoids unnecessary selling and can reduce tax liabilities or transaction costs. It is a patient, cost-conscious way of maintaining balance over time.

Constant-Mix Rebalancing

This strategy is for those who believe in sticking to a consistent allocation, no matter what the market says. It involves maintaining the original ratio—say, 70 percent equity and 30 percent debt—and rebalancing back to it whenever it drifts.

In periods of market swings, this approach results in buying underperforming assets and trimming the winners. While this may sound counterintuitive, it often leads to buying low and selling high, which is a good thing. However, it may also require frequent action in volatile markets, which can be tiring or costly without careful planning.

Momentum-Based Rebalancing

Unlike constant mix, momentum rebalancing shifts more funds toward assets that are currently performing well. It is based on the idea that trends tend to continue for a while—so why not ride the wave?

For example, if equities have been rising steadily for several months while bonds are flat, this strategy would allocate more toward equities. Some modern investment platforms offer tools that help track momentum, though many still prefer to do this manually. The challenge lies in knowing when the trend is truly over—because riding too long can mean falling off the wave.

Partial Rebalancing

Not every rebalancing needs to be all or nothing. Partial rebalancing is about adjusting only part of the difference between your current and target allocation. It’s a gentle course correction, rather than a sudden swerve.

For instance, if equity has grown from 50 to 60 percent, instead of cutting it straight back to 50, you might reduce it to 55 percent. This allows some flexibility, especially during uncertain times when you do not want to move too far too fast. It balances discipline with caution and is suited for investors who believe in gradual moves rather than sharp turns.

Goal-Based Rebalancing

Rather than looking at the portfolio as a single unit, this approach separates investments according to specific life goals—such as buying a home, funding education, or retiring comfortably.

Each goal has its own time frame and level of risk tolerance. So, the rebalancing happens within each “goal bucket.” For example, a portfolio meant for a near-term home purchase may be moved gradually toward safer assets as the goal nears, while a retirement fund still two decades away might stay in equities longer. It adds structure and meaning to investing and helps investors stay emotionally connected to their financial journey.

Tactical Rebalancing

This is the most flexible and opinion-driven of all strategies. Tactical rebalancing is done when the investor believes that the market outlook has changed significantly. For instance, in a rising interest rate environment, one might shift from long-term bonds to short-term instruments or other inflation-friendly assets.

This approach demands a good understanding of economic trends and the ability to make timely decisions. It works well when your view of the market turns out right, but it carries the risk of being swayed by emotions or headlines. Still, for some investors, being actively involved adds a sense of control and engagement.

🧭 Asset Rebalancing Strategies: A Comparative Snapshot

Strategy	What It Is	Ideal User	Limitations
1. Calendar-Based	Rebalance on a fixed schedule (monthly, yearly, etc.)	Discipline-loving investors, set-it-and-forget-it types	May ignore big market moves between intervals
2. Threshold-Based	Rebalance when asset class deviates beyond a fixed %	Active monitors, those with rebalancing alerts	Requires regular tracking or app-based automation
3. Hybrid (Calendar + Threshold)	Check periodically, rebalance only if deviation is significant	Cost-conscious yet responsive investors	Could still miss rapid market events
4. Constant-Mix	Always restore original ratio—buy low, sell high	Stoic investors who love balance	May underperform in rising markets
5. CPPI (Constant Proportion)	Increase risk exposure as portfolio grows, reduce when it shrinks	Capital preservation seekers, retirees	Could shift too much into debt during market dips
6. Tactical Rebalancing	Shift allocations based on market outlook or sentiment	Savvy investors, semi-active decision makers	Prone to emotional or biased moves
7. Dynamic Allocation	Model-based shifting of asset classes with market conditions	Investors using hybrid or dynamic funds	May not beat static models in bull markets
8. Glide Path	Reduce equity and increase safety as retirement nears	Retirement/goal-focused investors	Less adaptive to sudden opportunities
9. Opportunistic	Rebalance based on rare market events or gut-feel insights	Aggressive, seasoned investors	High risk if judgement goes wrong
10. Behavioural Rebalancing	Designed to offset human biases using automation/advisors	Emotional investors, beginners	Over-reliance on rules, may miss out on good opportunities
11. Sectoral Rebalancing	Balance across sectors within equity	Equity enthusiasts, sector-watchers	Not diversified enough across asset classes
12. Goal-Based	Rebalancing linked to life events and financial goals	Families, planners, middle-income Indian households	Less responsive to broader market shifts
13. Multi-Asset Rebalancing	Balancing equity, debt, gold, international funds etc.	Diversification seekers	Complexity in tracking and execution
14. Value Averaging	Invest more when markets fall, less when they rise, based on target portfolio values	Detail-oriented DIY investors	Time-consuming; needs frequent adjustments
15. Auto Rebalancing Tools	Platform-based automatic rebalancing (apps, robo-advisors)	Busy professionals, tech-savvy investors	Tool-dependent, one-size may not fit all

Staying Balanced Is a Strength

Many investors are surprised to learn how quickly their risk profile changes when they do not rebalance. It happens slowly, but the effects can be serious. A portfolio that becomes too heavy in one asset class can behave very differently during market corrections. Rebalancing helps you step back, take a fresh look, and adjust the mix so that you are not carrying hidden risks.

At the end of the day, every investment has a reason behind it. Maybe it is your child’s education, a home you want to buy, or the dream of retiring peacefully. Rebalancing is not about beating the market. It is about keeping your money in line with those personal dreams. It is a way of staying honest with your original intentions.

More Tools Are Coming to Make This Easy

There are many ways to rebalance, and I have tried to explain some of them in this article. Some are simple and fixed, others are more flexible. You can choose the one that suits your comfort and routine. To make things even easier, I am currently building a simulator that can help you try out different strategies and see what works best for your situation. It will be ready soon, and I hope it helps bring more clarity and confidence to your rebalancing journey.

So, if you haven’t rebalanced your portfolio in a while, now is the perfect time to start. Take a moment to assess your investment mix, rebalance accordingly, and ensure that your portfolio is working as hard as you are to secure your financial future.