How Contributions Do The Rebalancing For You

Restoring a portfolio's target weights normally means selling one holding to buy another. Where money is still being added, the same adjustment can happen without any sale at all.

Weights drift because prices move

A portfolio set to a chosen split does not stay there. Whichever holding rises fastest becomes a larger share of the total, and the others shrink in proportion.

The drift is not a mistake. It is the arithmetic consequence of holding assets that move at different rates, and it accumulates steadily.

Left alone for long enough, a portfolio ends up dominated by whatever has performed best, which typically means it carries more variation than was originally intended.

Selling to rebalance has costs

Correcting the drift by selling incurs dealing costs and spreads, and outside sheltered accounts it may realise gains with consequences that vary by jurisdiction.

It also requires an active decision to sell something that has performed well, which is psychologically harder than it sounds when written as a rule.

These frictions are the main reason rebalancing gets postponed, and postponement lets the drift continue accumulating.

New money can be directed instead

Where contributions are still being made, each one can be allocated entirely to whichever holding sits furthest below its target weight.

This moves the portfolio back towards its intended composition without selling anything, which removes the dealing costs on one side and the tax question entirely.

The effect is gradual rather than immediate, and it works best where contributions are meaningful relative to the portfolio's total value.

The method weakens as the portfolio grows

Early on, a monthly contribution can represent a large share of the total, so directing it has a substantial corrective effect.

As the portfolio grows, the same contribution becomes proportionally smaller and can no longer correct a large drift on its own.

At that point, contribution-based adjustment reduces how often selling is needed rather than eliminating it, which is still a worthwhile reduction.

Withdrawals work the same way in reverse

Where money is being drawn out rather than added, taking it from whichever holding sits furthest above its target has the same corrective effect.

This makes the withdrawal itself do the rebalancing, so the two decisions are handled together rather than as separate exercises.

Either direction requires knowing the current weights, so the practical requirement is a periodic check of what the portfolio actually holds against what it is supposed to.