Strategie
Regular Rebalancing as a Strategy in Its Own Right
Key takeaways
- Rebalancing restores the target allocation and systematically sells the overpriced component in favour of the cheaper one.
- Rebalancing too frequently increases costs and tax burden — the optimal frequency is annual or band-based.
- Band (tolerance band) rebalancing is more efficient than calendar rebalancing — it responds to actual deviations.
- In the Czech Republic, selling before three years can trigger a taxable gain; rebalance using new contributions first.
- The rebalancing bonus (systematic buying of dips) is real but modest in practice — the main value is risk management.
Regular rebalancing is the discipline of returning the portfolio to its target allocation by selling components that have risen in price and buying those that have fallen — thereby automatically adhering to the rule of "buy low, sell high".
Why portfolios drift
Suppose you target 80% equities / 20% bonds. After three strong years in the equity market, your allocation might be 90/10. You are now bearing more risk than you planned. Rebalancing corrects this — and in doing so, it automatically realises the gain from the overweighted component and buys the component that has fallen.
How to rebalance: calendar vs. band approach
- Calendar rebalancing: once a year, regardless of the deviation. Simple, predictable, low transaction costs.
- Band (tolerance band) rebalancing: rebalance when a component deviates from its target by more than 5–10%. More efficient, but requires monitoring.
- Contribution rebalancing: direct new money preferentially into the underweighted component — no sale required, eliminating tax costs.
Tax aspects in the Czech Republic
Every sale of an ETF or stock before the three-year time test has elapsed generates a taxable gain (15% personal income tax). Rebalancing by selling can therefore be costly from a tax perspective. Solutions:
- Rebalance using contributions first.
- Sell only positions that have already passed the three-year test.
- Consider rebalancing through buying (not selling) — sell only the bare minimum.
The rebalancing bonus: reality vs. myth
Academics have documented a so-called rebalancing bonus — a small systematic return from buying dips. In practice it is modest (0.1–0.5% per year) and depends on asset correlation. The main value of rebalancing is risk management, not return generation. Rebalancing is a discipline tool. Where it fits into the broader core-satellite strategy is described in the previous article.
FAQ
What is portfolio rebalancing?
Restoring the target asset allocation by selling components that have grown beyond their target weight and buying those that have fallen below it. It prevents excessive risk and systematically sells high and buys low.
How often should you rebalance?
Once a year on a calendar basis, or when any component deviates more than 5–10% from its target (the band approach). Rebalancing too frequently raises costs and tax burden without proportionate benefit.
How can you rebalance without tax costs?
First direct new contributions to the underweighted component. If that is not sufficient, sell only positions that have passed the three-year time test for tax exemption in the Czech Republic.
What is the rebalancing bonus?
A small systematic return (0.1–0.5% per year) from the fact that rebalancing automatically buys fallen components. It is real but modest. The primary value of rebalancing is discipline and risk management, not return generation.