Note: This article discusses Indonesian financial products and markets. The principles apply globally, though specific products, regulations, and tax treatments vary by country.

Portfolio Rebalancing

You’ve already determined your asset allocation — say 70% stocks and 30% bonds. But over time, this proportion will shift because each asset performs differently. Rebalancing is the process of returning your portfolio to its target allocation.

Why Does Your Portfolio Need Rebalancing?

Simple example:

	Start of Year	End of Year (without rebalancing)
Stock mutual fund	Rp 70 million (70%)	Rp 84 million (+20%)
Bond mutual fund	Rp 30 million (30%)	Rp 31.5 million (+5%)
Total	Rp 100 million	Rp 115.5 million
New allocation	70/30	72.7/27.3

After stocks rose 20% and bonds rose 5%, your allocation shifted from 70/30 to 73/27. Your portfolio is now riskier than your original plan.

If left unchecked for years, your portfolio could shift to 85/15 or even 90/10 — far from your plan.

How to Rebalance

There are two main methods:

Method 1: Buy-Sell (Traditional)

Sell assets whose proportion is too large, buy assets whose proportion is too small.

From the example above:

• Target: 70% stocks = Rp 80.85 million; 30% bonds = Rp 34.65 million
• Action: Sell Rp 3.15 million of stock mutual fund, buy Rp 3.15 million of bond mutual fund

Advantage: Portfolio immediately returns to target. Disadvantage: There could be transaction costs (for ETFs/direct stocks). For mutual funds, there are no costs.

Method 2: New Investment Allocation (More Practical)

Instead of selling, direct new investments to assets whose proportion is lacking.

From the example above:

• Bonds are 2.7% below target
• Next month’s Rp 2 million investment → allocate more to bonds until proportions are balanced again

Advantage: No need to sell anything, no transaction costs, no tax events. Disadvantage: Slower — takes several months to return to target if deviation is large.

For most investors with regular monthly investments, Method 2 is sufficient.

When to Rebalance?

There are two approaches:

Calendar-Based Approach

Rebalancing at fixed time intervals:

Frequency	Suitable For
Monthly	Too frequent — usually not necessary
Quarterly	Good enough
Semi-annually	Most popular choice
Annually	Simple, effective

Recommendation: once a year or every 6 months. Just open your portfolio, see if allocation is still close to target, and adjust if needed.

Threshold Approach (Band-Based)

Rebalance only if allocation deviates more than a certain limit:

Target Allocation	Threshold	Rebalance If…
70% Stocks	± 5%	Stocks > 75% or < 65%
30% Bonds	± 5%	Bonds > 35% or < 25%

Advantage: More efficient — you don’t rebalance if deviation is still small. Disadvantage: Need to monitor portfolio more frequently.

Rebalancing in Practice in Indonesia

Because mutual funds in Indonesia are not taxed on gains* and there are no buy/sell fees on platforms like Bibit and Bareksa, rebalancing in Indonesia is very easy and free.

Aspect	Indonesia	Other Countries (e.g., US)†
Tax when selling mutual funds	0%	Could be subject to capital gains tax
Fee for selling mutual funds	0%	Could have redemption fee
Fee for buying mutual funds	0%	Could have subscription fee
Barriers to rebalancing	Practically none	Taxes and fees are considerations

This is a huge advantage for Indonesian investors — you can rebalance without any cost consequences.

Annual Rebalancing Example

Budi has a portfolio with a target of 70% stocks / 30% bonds. Here’s what happened over 3 years:

Year 1

Asset	Value	Proportion	Target	Action
Index mutual fund	Rp 84 million	73%	70%	Sell Rp 3.5 million
Bond mutual fund	Rp 31 million	27%	30%	Buy Rp 3.5 million

Year 2 (after market declined)

Asset	Value	Proportion	Target	Action
Index mutual fund	Rp 65 million	62%	70%	Buy Rp 8.4 million
Bond mutual fund	Rp 40 million	38%	30%	Sell Rp 8.4 million

Notice Year 2: rebalancing forces you to buy stocks when prices are down and sell bonds when prices are up. This is automatic “sell high, buy low” — without needing to guess market direction.

Year 3

Asset	Value	Proportion	Target	Action
Index mutual fund	Rp 95 million	71%	70%	Sell Rp 1.3 million
Bond mutual fund	Rp 39 million	29%	30%	Buy Rp 1.3 million

Small deviation (1%) — you could also choose to do nothing.

Does Rebalancing Increase Returns?

Academic research shows mixed results. Rebalancing is not guaranteed to increase returns, but:

1. Maintains risk level according to plan — this is the main benefit
2. Forces discipline — sell what’s up, buy what’s down
3. Prevents portfolio from becoming too aggressive as you approach your investment goal

Think of rebalancing as a risk management tool, not a return enhancement tool.

Practical Tips

1. Record your target allocation — write it in phone notes or a spreadsheet
2. Schedule reminders — for example every January 1 and July 1
3. Use new investment method if deviation is small (<3%)
4. Buy-sell if deviation is large (>5%) — in Indonesia this is free for mutual funds
5. Don’t rebalance too often — checking your portfolio every day isn’t rebalancing, that’s anxiety

The Psychology of Rebalancing: Why It’s Harder Than It Looks

Rebalancing sounds simple on paper, but in practice it fights against powerful psychological biases.

Recency Bias

When stocks have been rising for 3 years straight and are now 80% of your portfolio (above your 70% target), your brain tells you: “Stocks are winning! Why would I sell the winners?”

When bonds have been falling and are now only 20% of your portfolio (below your 30% target), your brain says: “Bonds are losers. Why would I buy more?”

Rebalancing forces you to sell what feels good and buy what feels bad. This is psychologically difficult but mathematically correct.

The “This Time Is Different” Trap

Every market cycle, investors convince themselves the current trend will continue forever:

• 2017-2019: “Stocks only go up”
• 2020: “Everything is crashing, don’t catch a falling knife”
• 2021: “Tech stocks are the future, bonds are dead”

Rebalancing discipline forces you to ignore these narratives and stick to your plan. The plan was made when you were calm and rational, not when markets were extreme.

Loss Aversion and Paper Gains

Selling winning positions to buy losing positions feels like you’re “locking in” gains and “throwing good money after bad.” But:

• You’re not locking in anything — you’re just shifting to another investment
• “Losing” positions might be temporarily down but still fundamentally sound
• Rebalancing prevents you from becoming over-concentrated in one asset class

Solution: Automate as much as possible. Use calendar reminders. Follow the process mechanically without overthinking.

Rebalancing Across Multiple Accounts

Many investors have multiple accounts — platform accounts, securities accounts, pension funds. How do you rebalance across them?

Treat All Accounts as One Portfolio

Example: Rina has:

• Bibit account: Rp 50 million (index mutual fund)
• Securities account: Rp 30 million (stocks)
• Employer pension fund: Rp 20 million (mixed allocation)

Total portfolio: Rp 100 million Target: 70% stocks / 30% bonds

Calculate current allocation across ALL accounts:

• Stocks (index fund + individual stocks + pension stock portion): Rp 75 million = 75%
• Bonds (pension bond portion): Rp 25 million = 25%

She’s 5% over-allocated to stocks. To rebalance:

• Option A: Reduce stock purchases in Bibit, increase bond fund purchases
• Option B: In pension fund elections, choose more conservative allocation
• Option C: In securities account, buy bond ETFs instead of stocks

Asset Location Strategy

Some accounts have tax advantages (like pension funds). In markets with capital gains taxes:

• Hold tax-inefficient assets (bonds, REITs) in tax-advantaged accounts
• Hold tax-efficient assets (index funds) in taxable accounts

In Indonesia, mutual funds are already tax-exempt for individuals, so this is less critical. But it’s worth understanding if you invest internationally.

Rebalancing for Different Life Stages

Your rebalancing strategy should evolve with your life stage:

Accumulation Phase (20s-40s)

• Higher risk tolerance — can weather volatility
• Longer time horizon — can recover from downturns
• Regular contributions — use new money to rebalance (Method 2)
• Frequency: Annual rebalancing is sufficient

Example allocation: 80% stocks / 20% bonds, rebalanced annually.

Pre-Retirement (50s-early 60s)

• Gradually reducing risk — shift from 80/20 to 70/30 to 60/40 over time
• More frequent rebalancing — semi-annual or threshold-based (±5%)
• Larger portfolio — deviations can be significant in absolute terms
• Focus on capital preservation alongside growth

Retirement (65+)

• Conservative allocation — perhaps 50% stocks / 50% bonds
• More frequent rebalancing — quarterly or threshold-based (±3%)
• Sequence of returns risk — early years of retirement are critical
• Consider bucket strategy — multiple sub-portfolios with different time horizons

Common Rebalancing Mistakes

1. Rebalancing Too Frequently

Mistake: Checking portfolio weekly and rebalancing every small deviation.

Why it’s bad:

• Creates unnecessary work
• Might incur transaction costs (for stocks/ETFs)
• Reduces compound growth by interrupting winning positions too early

Solution: Stick to annual or semi-annual schedule, or use ±5% threshold.

2. Never Rebalancing

Mistake: “Set it and forget it” taken too literally — never checking allocation.

Why it’s bad:

• Portfolio can drift to 90/10 or even 95/5 stocks/bonds
• Risk level no longer matches your plan
• When market crashes, you might panic-sell because you’re over-exposed

Solution: Calendar reminder twice a year. Takes 30 minutes total.

3. Emotional Rebalancing

Mistake: Only rebalancing when you “feel” like it — usually after major market moves.

Why it’s bad:

• Timing based on emotion, not strategy
• Often leads to buying high (after stocks rally) and selling low (after crashes)
• Defeats the purpose of disciplined rebalancing

Solution: Calendar-based or threshold-based, executed mechanically.

4. Ignoring Small Positions

Mistake: Having 15 different holdings, only rebalancing the 3 biggest ones.

Why it’s bad:

• Small positions can drift significantly in percentage terms
• Portfolio becomes messy and hard to manage
• Defeats the purpose of having a clean allocation plan

Solution: Simplify your portfolio. Most investors need 3-7 holdings max.

5. Rebalancing Without Considering Contributions

Mistake: Selling to rebalance while still making monthly contributions.

Why it’s bad:

• Incurs unnecessary transactions when you could just direct new money appropriately
• Wastes time and potential transaction costs

Solution: If you’re still in accumulation phase and contributing regularly, use new money first. Only sell if drift is large (>5-7%).

Advanced Technique: Threshold Bands by Volatility

Different asset classes have different volatility profiles. You can set different threshold bands accordingly:

Asset Class	Normal Volatility	Suggested Band
Stocks	High	±5%
Bonds	Low	±3%
Cash/Money Market	Very Low	±2%

Example:

• Target: 60% stocks / 30% bonds / 10% cash
• Rebalance stocks if they drift outside 55-65%
• Rebalance bonds if they drift outside 27-33%
• Rebalance cash if they drift outside 8-12%

This prevents over-trading less volatile assets while catching significant drifts in volatile assets.

Rebalancing and Market Timing: Not the Same Thing

Important distinction:

• Market timing: “I think stocks will drop, so I’ll sell and wait”
• Rebalancing: “Stocks are now 75% of my portfolio instead of my planned 70%, so I’ll reduce to 70%”

Rebalancing is not a prediction about market direction. It’s a mechanical process to maintain your chosen risk level. You’re not saying “stocks are overvalued” — you’re saying “my portfolio is riskier than I planned.”

This distinction is crucial. Rebalancing is disciplined, repeatable, and emotionally neutral. Market timing is speculation.

Conclusion

• Rebalancing returns your portfolio to target allocation
• Do it 1-2 times per year or when deviation exceeds 5%
• In Indonesia, mutual fund rebalancing is free and tax-exempt — take advantage of it
• Most practical method: direct new investments to assets whose proportion is lacking
• Rebalancing is a risk management tool, not a return enhancer
• Set a schedule, do it, and forget until the next schedule

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Sources & References:

* Mutual funds in Indonesia are exempt from capital gains tax for individual investors according to UU PPh (Income Tax Law) No. 36 Tahun 2008 Article 4 paragraph (3) letter i. Source: pajak.go.id — Pasal 4 ayat 3.
† Comparison with US tax system based on IRS provisions for mutual funds. In the US, mutual fund sales can trigger capital gains tax according to the investor’s marginal rate.

Practical tips:

• Platforms like Bibit, Bareksa, and IPOT do not charge subscription or redemption fees for most mutual fund products.
• Verify with each product’s fund fact sheet before transacting to ensure there are no hidden fees.

Disclaimer: This article is for educational purposes only, not investment advice.

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• Portfolio Rebalancing: Complete Guide on When and How to Do It
• Asset Allocation and Your Risk Tolerance
• How to Evaluate Portfolio Performance: Look Beyond Returns
• Why Dividends Aren’t Everything
• Reducing Risk: Diversification in Indonesia