Rebalancing is the process of returning your portfolio to its target allocation after market movements cause it to drift. Without rebalancing, a bull run in one asset class can leave you with far more risk than intended.
Rebalance when your actual allocation drifts 5+ percentage points from target — roughly once a year for most investors. The most tax-efficient method: redirect new contributions to underweight funds rather than selling. PIE managed funds (InvestNow, Kernel) handle internal rebalancing without triggering taxable events. For non-PIE assets, selling triggers income tax.
Why Portfolios Drift (and Why It Matters)
If you target 80% global shares / 20% NZ shares, after a year of strong US markets you might end up at 88% global / 12% NZ. This:
- Increases your risk (more concentrated in whichever asset rose)
- Reduces diversification benefits
- Means you’re implicitly “buying high” in the outperforming asset
Rebalancing brings you back to target — effectively selling high and buying low automatically.
How Much Drift to Tolerate?
Most financial advisers and research suggest rebalancing when drift exceeds 5 percentage points from your target. Under 5 points: transaction costs and complexity outweigh the benefit.
| Drift from target | Action |
|---|---|
| Under 3% | Ignore — noise in the system |
| 3–5% | Monitor, redirect contributions if convenient |
| 5–10% | Rebalance at next opportunity |
| 10%+ | Rebalance promptly — significant risk drift |
Three Rebalancing Strategies
Strategy 1: Contribution-based rebalancing (best for most NZ investors)
Instead of selling anything, direct new contributions entirely to the underweight fund.
Example:
- Target: 80% global / 20% NZ
- Actual after drift: 87% global / 13% NZ ($87,000 + $13,000 = $100,000)
- Next $2,000 contribution: put 100% into the NZ fund
- Result: $87,000 global / $15,000 NZ = 85% / 15% — closer to target
Advantages:
- No selling = no taxable event
- Lower transaction cost (no brokerage on sale)
- Natural dollar-cost averaging discipline
Disadvantage: Slow rebalancing if the drift is large and contributions are small relative to portfolio size.
Strategy 2: Annual calendar rebalancing
Check your portfolio once per year (e.g., January 1) and rebalance to target regardless of drift level.
Advantages:
- Simple — only one decision per year
- Removes emotion (rebalancing on a schedule, not a feeling)
Disadvantage: May rebalance when drift is minimal (unnecessary); may miss significant drift between checks.
Strategy 3: Threshold + calendar hybrid
Check annually; rebalance only if drift exceeds 5 percentage points. This combines the discipline of a calendar with the practicality of thresholds.
Research finding: Threshold-based rebalancing (5% bands) outperforms pure calendar rebalancing in most backtests, partly due to reduced transaction costs and tax events.
Tax Implications of Rebalancing in NZ
PIE managed funds (InvestNow, Kernel, Simplicity)
Rebalancing within a PIE fund (e.g., a fund that internally adjusts its holdings) is tax-neutral for you — the fund manager handles it.
Rebalancing between PIE funds (e.g., selling InvestNow International, buying InvestNow NZ Shares) is also generally straightforward — PIE funds are taxed on accrual (income recognised annually), not on realised gains. No capital gains event is triggered when you sell PIE units in NZ.
Key takeaway: Rebalancing PIE funds is tax-efficient — the main cost is brokerage/spread (usually nil for managed funds).
Non-PIE investments (direct shares, non-PIE ETFs, US ETFs)
Selling non-PIE investments to rebalance can trigger a taxable income event. NZ has no capital gains tax in most cases, but:
- IRD considers frequent trading to be “trading on revenue account” — profits taxable as income
- US ETFs (VOO, VTI): FIF tax is applied annually on opening value regardless of whether you sell — but selling and switching still generates a separate income recognition event
Best practice for non-PIE: Use contribution-based rebalancing — don’t sell; just direct new money to underweight assets.
Rebalancing with KiwiSaver
Don’t forget your KiwiSaver is part of your overall asset allocation. If your KiwiSaver fund is 50% bonds and you hold 0% bonds in your investment portfolio, your true bond allocation is the weighted average.
Example:
- $60,000 in KiwiSaver balanced fund (50% equities, 50% bonds)
- $40,000 in investment portfolio (100% equities)
- True allocation: $42,000 equities + $30,000 bonds = 58% equities / 42% bonds overall
Factor KiwiSaver in before concluding your portfolio needs rebalancing.
Step-by-Step Rebalancing Checklist
- Set a calendar reminder — once per year (e.g., 1 January or your investment anniversary date)
- Record current values across all investment accounts including KiwiSaver
- Calculate current allocation — what % is each asset class?
- Compare to target allocation — how much has each drifted?
- If drift > 5%: Direct next contributions to underweight funds, or sell overweight (factoring in tax)
- Record the rebalance — date, allocations before/after
- Set next reminder — 12 months later
Does Rebalancing Improve Returns?
Not necessarily. Rebalancing’s primary benefit is risk management, not return enhancement. Studies show:
- Rebalancing does not consistently improve returns versus a buy-and-hold approach
- It does consistently maintain your intended risk level
- In strongly trending markets (long bull runs), rebalancing may slightly reduce returns by trimming the winner
- In volatile markets, rebalancing improves returns by forcing buy-low discipline
Bottom line: Rebalance to maintain your intended risk level — not to chase higher returns.
Frequently Asked Questions
What if I have a lump sum? Should I rebalance before investing? If putting a lump sum into a portfolio that’s already drifted, you can use the lump sum itself to rebalance — allocate the full amount to the underweight asset class.
Should I rebalance every time the market crashes? No need to rebalance in a crash unless your drift exceeds 5%. Crashes are often followed by recovery — if you rebalance by buying equities in a crash (they become underweight) and markets recover, you benefit. But chasing the crash to rebalance is psychologically hard and often backfires.
How does Sharesight help with rebalancing? Sharesight’s rebalancing report shows exactly how far each holding is from your target weighting and how much to buy/sell to restore it. Useful for complex multi-asset portfolios.