Module 7 · Rebalancing and Staying the Course Advanced

A portfolio left alone drifts. The part that did well grows into a bigger share, and your risk quietly changes. Rebalancing fixes that. It takes minutes, and it is the only regular maintenance an ETF portfolio needs.

Why portfolios drift

Suppose you start with $10,000 at 60% stocks and 40% bonds: $6,000 and $4,000. Over a year, stocks rise 20% and bonds are flat.

Nothing went wrong. But you now hold more stocks than you decided was right for you, so the next fall will hurt more than you planned for. After several strong years the drift can be large.

How to rebalance

Continuing the example. The total is $11,200. The 60% target for stocks is $6,720. You hold $7,200, so you sell $480 of stocks and buy $480 of bonds. You are back to 60/40.

Rebalancing with new money. Often you do not need to sell anything. Direct your next contributions to whichever fund is below target until the weights line up. This avoids trading costs and, in a taxable account, avoids triggering capital gains.

If you hold an all-in-one ETF, the fund does this for you.

When to rebalance

Two simple rules. Pick one and write it down.

• Calendar: check once or twice a year on a fixed date and rebalance if needed.
• Threshold: rebalance whenever a holding is more than a set distance from its target, commonly 5 percentage points.

In the example above, stocks are at 64.3% against a 60% target: 4.3 points over. With a 5-point threshold you would leave it alone for now.

Rebalancing more often than this adds cost and effort without much benefit. Its purpose is to control risk, not to boost returns.

Staying the course

The hardest part of ETF investing is not choosing funds. It is doing nothing when markets are falling and every headline says to get out.

A fall needs a larger gain to recover: a 50% drop requires a 100% rise to get back to even.

That sounds like a reason to sell early. In practice, investors who sell during a fall tend to miss the rebound, because the strongest days often come close to the worst ones. Selling turns a temporary decline into a permanent loss.

What helps:

• A written plan. Your mix, your funds, your rebalancing rule, and the sentence “I will not sell because prices fell.”
• An emergency fund in cash, so you are never forced to sell investments to pay a bill.
• Automation. Contributions that happen without you deciding each month.
• Looking less often. Checking daily makes normal swings feel like emergencies.

Put it into practice