Rebalancing calculator: what to buy and sell

What a rebalancing calculator works out

A portfolio is set up with a split in mind — so much in one fund, so much in another. Then the holdings grow at different speeds, and the split moves on its own. Nobody traded anything; one part simply outgrew the rest. A rebalancing calculator measures how far each holding has drifted from the share you meant it to have, and works out the trades that would put it back.

The target is yours, not ours. This page has no opinion on what split anyone should hold — the example numbers it opens with are labelled A, B and C precisely so they cannot be mistaken for a suggestion. What it does is the arithmetic between two allocations you chose: the one you have and the one you want.

Two ways to get back: selling, or new money

The obvious way is to sell some of whatever is over target and buy whatever is under. On the opening example — A worth $62,000, B $25,000 and C $13,000, against targets of 50%, 30% and 20% — that means selling $12,000 of A and buying $5,000 of B and $7,000 of C. The sales and purchases cancel out, so the portfolio is the same $100,000 afterwards, just split differently.

The other way is to leave everything where it is and point new money at whatever is short. That avoids a sale, but it takes more money than people expect, because the holding that is furthest over target sets the size of the job. A is $62,000 and has to end up as 50% of the whole, so the whole has to reach $124,000 before A stops being too big. That is $24,000 of new money — twice the $12,000 the selling route moves — just to stand still on A while B and C catch up. The calculator prints this figure for any portfolio, under “New money to rebalance without selling”.

Switch selling off and add less than that, and the calculator spends what there is on whatever is furthest under target first, topping each one up until they are all short by the same amount. With $5,000 it buys $1,750 of B and $3,250 of C, which leaves both about 4.5 points under target instead of 5 and 7.

Why drift is shown in points, not percent

C on the example holds 13% of the portfolio against a 20% target. That is 7 percentage points under — but it is also 35% below its own target, because 13 is 35% less than 20. Both descriptions are true, and they rank holdings differently: a small holding can be far off its own target while barely moving the portfolio. This page uses percentage points throughout, the gap between the two shares, because that is the measure that adds up across the whole portfolio. If a rebalancing rule you read about says “5%”, it is worth checking which of the two it means.

What the trades leave out

The figures are the trades before any cost of making them. Dealing charges, the spread between buying and selling prices, and minimum trade sizes all vary by platform and are not included. Neither is tax: whether a sale creates a tax bill on a gain depends on the type of account and the country, and a wrong assumption there would be worse than none. If you sell something that has gone up, check that part separately before treating the sale as free.

Rules about when to rebalance come in two shapes — on a calendar (once a year, say) or when drift passes a threshold (any holding more than a set number of points out). This page does not pick between them or suggest a threshold. It answers the question either rule eventually asks: given these holdings and this target, what exactly would the trades be?

Where it fits with the other tools

Rebalancing is a quiet assumption behind a lot of retirement arithmetic. The study behind the 4% rule, for example, ran its main charts on a portfolio continually rebalanced back to a fixed split — one of several conditions behind the rule that are easy to miss when it is quoted. If you are deciding whether to put a windfall in all at once or in stages, the lump sum vs monthly calculator prices that choice, and the new money can then go in through the no-selling mode above. For what a single holding might grow to over time, see the investment growth calculator; and for why the holdings drift apart in the first place, returns are not a straight line.

Not advice. This tool applies arithmetic to assumptions you entered. It does not know your circumstances, your tax position or your goals, and it is not a recommendation to buy, sell or hold anything. Past returns do not predict future ones, and no figure here is a forecast.