Outside super, selling assets can create a capital gain, and the capital gains tax rules change from 1 July 2027, so how you rebalance matters as much as why. Often you can do it without selling much at all.
What drift does to your investment portfolio
Drift happens when one part of a portfolio outpaces the rest. After a strong run in shares, growth assets take up more of the portfolio than you planned, and after a sell-off the reverse happens.
It builds more than many investors expect. Vanguard’s research found that a 60/40 portfolio, left alone from 1 October 2000 to 30 June 2025, saw its share allocation swing between 40% and 70%.
Why portfolio rebalancing matters
Rebalancing is a risk management tool, and it doesn’t rely on forecasting or timing the market. Its job is to keep your portfolio close to the one you designed.
It keeps your risk where you set it
Your target asset allocation should reflect how much risk you can live with and what the money is for. A portfolio that drifts from 60/40 to 70/30 carries more share market risk than you agreed to, often without you noticing.
It builds discipline into your investment strategy
Rebalancing is a rule you set in advance: trim what has grown and top up what has fallen behind. You tend to sell high and buy low as a by-product, without predicting anything.
It can feel wrong to sell something that has done well, which is exactly why a rule helps. Vanguard frames rebalancing as a guard against rash decisions driven by fear or greed during market fluctuations. A rule decided on a calm day is easier to follow during market volatility, and it keeps emotion out of the investment process.
It protects diversification across asset classes
Different asset classes tend to do well at different times, so a deliberate mix spreads your sources of return and risk. Most multi-asset portfolio construction starts with Australian and global equities alongside Australian and global fixed income. When one side dominates, you lose the balance between both equities and fixed income the portfolio was built around, and you can end up overly exposed to whichever market has done best lately.
The target doesn’t need to be evenly distributed. A 50/50 equities vs fixed income split is one option, and 80/20 or 40/60 are just as valid; rebalancing returns you to whichever target mix you chose.
What it means for returns
Over long periods, rebalancing usually makes a modest difference to returns in either direction. What it controls is how much volatility you carry along the way, which is where any improvement in risk-adjusted returns comes from.
Any comparison of historical portfolio performance comes with the usual caveat: past performance is not a reliable indicator of future performance. In a long bull market, a portfolio allowed to drift towards shares can finish ahead, though it carries higher risk to get there. The case for rebalancing rests on risk control, and any return benefit is a bonus.
How often should you rebalance your portfolio?
Most investors are well served by reviewing their allocation once a year and acting only when drift is large enough to matter. Rebalancing on a weekly or monthly basis generally isn’t recommended, because turnover and transaction costs add up. Deciding when it’s time to rebalance comes down to three approaches.
Calendar rebalancing
You reset your mix on a fixed date, such as the end of the financial year. It’s simple to stick to, but you might trade on tiny drift or miss a big move between reviews.
Threshold rebalancing and the 5/25 rule
You act only when an asset class moves by a set distance from its target, such as 5 percentage points in either direction. It’s a more responsive approach in volatile markets, though it means watching your mix more closely.
A more detailed version is the 5/25 rule. You rebalance when an asset class moves 5 percentage points from its target or 25% of its proportion from the target, whichever is smaller. In practice, a 60% share allocation is rebalanced if it falls below 55% or exceeds 65%, while a 10% allocation is rebalanced if it falls below 7.5% or exceeds 12.5%.
Large institutional funds often work to tighter bands of 1% to 2%. For the average retail investor paying brokerage and spreads, wider bands are usually more practical.
A hybrid approach
For many people, the practical middle path is to check on a schedule, say once or twice a year, and act only if a threshold has been crossed. The exact interval or threshold you pick matters less than applying it consistently. The best portfolio rebalancing strategy is the one you’ll actually follow, and it can sit alongside whatever other investing strategies you use.
How to rebalance a multi-asset portfolio
- Confirm your target asset allocation still suits your investment goals. This is where investment planning does the groundwork, because the right mix depends on your time frame, income needs and risk tolerance.
- Check your current mix across all accounts, including your super, and compare it to your trigger.
- Direct new contributions to the underweight side first.
- Redirect dividends and distributions the same way, rather than reinvesting them where they were paid.
- Sell down the overweight side only if the drift persists, and check the tax position of each parcel before selling securities.
- Record what you did and set the date of your next review.
Why new money comes first
Topping up the underweight side with fresh money means nothing is sold, so no capital gain is triggered. It’s how a portfolio manager running a large fund usually keeps a portfolio aligned, using cash inflows to buy underweight assets and limit realised gains. You can do the same with regular contributions, a bonus or a significant amount of cash from elsewhere. After a strong year for shares, that usually means buying more bonds.
The limit is time. When drift is large, and there’s little new cash, the gap can take a long while to close. Using both methods tends to work well: redirect first, then sell only what’s left.
Does rebalancing trigger capital gains tax?
Selling an investment you hold outside super can create a capital gain or loss, so the order and timing of each sale matter. These are the tax implications to check first.
The 12-month rule and the 50% CGT discount
Under the current rules, the ATO allows you to reduce a capital gain by 50% if you’re an Australian resident for tax purposes and have owned the asset for at least 12 months. The day you bought and the day of sale don’t count towards the 12 months, so check each parcel’s dates before selling. Complying super funds receive a 33.33% discount instead.
Using capital losses
The ATO requires capital losses to be subtracted from capital gains before the discount is applied. If some holdings are sitting at a loss when you sell down, they can reduce the tax on your gains, though a loss on its own is no reason to sell.
What changes from 1 July 2027
The capital gains tax reform announced in the 2026-27 Federal Budget on 12 May 2026 is now law. From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships is replaced with cost base indexation and a 30% minimum tax rate on capital gains. The new rules apply only to gains that accrue after 1 July 2027.
For assets held across that date, the gain is split in two. Under the Budget 2026-27 tax explainer, the 50% discount applies to growth up to an asset’s value as at 1 July 2027, with indexation and the minimum tax applying to growth thereafter. That means many investors may not need to sell before 30 June 2027 purely to protect the discount on gains already built up, though it’s worth checking how the split applies to your own holdings first.
The minimum rate matters if you planned to sell in a lower-income year. A 30% floor on capital gains takes much of the benefit out of delaying sales until your marginal tax rate falls, something many pre-retirees plan for early in retirement. How the change affects your own investment decision depends on your individual circumstances, so we’d suggest personal advice, along with tax advice where relevant, before selling large holdings.
Do you need to rebalance your super?
It depends on how your super is invested. In a pre-mixed option, such as a MySuper diversified or lifecycle option, the fund manages the mix of shares, property, bonds and cash even if you make no changes yourself.
If you’ve built your own mix from single-asset-class options, keeping it on target is up to you, and most funds let you change your investment options online or by phone. As retirement gets closer, a balanced or conservative option may help protect your super.
If you hold investments both inside and outside super, it usually makes sense to treat them as one household allocation. You might keep more growth assets in super and more defensive assets outside it, and still have the overall mix you want. Our superannuation advice considers both sides.
Is it better to rebalance when the market is down?
A rule set in advance tells you when to act, whether markets are up or down. After a fall, that may mean topping up stocks and share funds when they feel least appealing, which is the buy-low half of the rule at work. No one can reliably pick the bottom, so the rule matters more than the timing. Redirecting contributions in stages can make it easier to follow through, whatever the market conditions.
When it may be better to wait
It may be worth holding off when:
- the drift is small, and the transaction costs would outweigh the benefit
- selling would crystallise a large gain on a parcel just short of the 12-month mark
- upcoming contributions, dividends or distributions can close the gap without a sale
- your goals or time frame have changed, in which case the target itself needs resetting
That last point matters. A growth-oriented investor who is now five years from retirement may need a new target allocation at a lower level of risk, rather than a trim back to the old one. Our guide to retirement planning in Australia covers how to tell whether you’re on track.
When tailored advice helps
General advice goes a long way, but personal investment advice tends to earn its place when you’re approaching retirement, when drift has become large, when you’re sitting on significant unrealised gains, or when your holdings sit across super and non-super accounts. That’s when the order of sales, the timing around 1 July 2027 and your super option all interact.
At Steel Lake Advisory Services, we look at your whole financial situation, set a mix that fits your financial goals, investor needs and desired level of risk, and build rebalancing into your reviews. We’re not affiliated with any investment product providers, and our costs are transparent, so you know our exact fee before proceeding. If you’re still weighing up the value, our article Is a financial advisor worth it in Australia? is an honest place to start.
When you’re ready, book an initial consultation or call 1300 778 819.
