After a market rally: rebalance the risk, not the headlines

Success can quietly change the portfolio

A portfolio selected as 60% equities and 40% bonds can become much more equity-heavy after a strong rally. Nothing was purchased, yet expected volatility and potential loss have increased. Rebalancing sells, buys or redirects new cash to return toward the agreed strategic range. It does not assert that recent winners are overpriced or that bonds will outperform next. The purpose is governance: keep the risk aligned with objectives, time horizon and loss capacity. Before acting, confirm that the original strategy still fits; restoring an outdated allocation is disciplined but not necessarily sensible.

Set rules before emotions arrive

Define target weights, tolerance bands and a review frequency. Small deviations may be corrected with dividends or new contributions, avoiding sales. Larger drift can require trades. Include all accounts and pension assets where appropriate so one portfolio is not rebalanced in isolation. Check product liquidity, bid-ask spread, custody and transaction fees. Tax treatment varies by investor and account; a Swiss private investor should not assume every gain is automatically treated the same in unusual trading circumstances. Document the reason as risk control, not market timing.

A hypothetical rally

Leila begins with CHF 200,000 split 60/40. After equities rise and bonds lag, the mix reaches 72/28. Her written band allows 55–65% equities, so the portfolio is outside policy. She first directs CHF 8,000 of new savings and cash distributions to bonds, then sells only enough equities to return near 63%. She checks costs and retains her emergency reserve separately. If her home purchase had moved closer, she might change the strategic target instead. The figures illustrate a method and do not predict returns or prescribe an allocation.

Every method has a cost

Calendar rebalancing is simple but may trade when drift is tiny. Bands respond to risk but require monitoring. New-cash rebalancing reduces tax and transaction friction but can be too slow for a large portfolio. Selling winners feels uncomfortable and may create costs; not selling concentrates risk. A market fall immediately after the trade can make the decision look wrong even though the process worked as designed. Judge the method by adherence and risk, not the next month’s performance.

Write a one-page rebalancing policy

State goal, horizon, target, bands, eligible assets, review date and who can act. Require a fresh suitability review after marriage, retirement, major purchase or income shock. At each checkpoint, calculate drift from reliable valuations, estimate all costs and use cash flows first where appropriate. Record the decision, including a reason for doing nothing. Verify providers and understand products before trading. Rebalancing cannot guarantee returns or prevent loss; it prevents yesterday’s winner from silently rewriting tomorrow’s risk budget.

Record the target allocation, tolerance bands, tax lots, fees and reason for each trade before execution. The written rule makes it easier to separate disciplined maintenance from a market forecast. It also supports a later review of whether the rebalancing method remained proportionate when portfolio size, retirement horizon or household cash needs changed.