If you are a UK investor who has set a target asset allocation for your portfolio, you are already ahead of the curve. However, maintaining that careful balance between stocks, bonds, and cash requires active management, especially during extended bull markets.
Why Your Portfolio Is Probably Out of Balance
Market fluctuations constantly alter your portfolio's composition. A mix that was perfect a decade ago is likely very different today. For instance, a portfolio that began with 60% stocks and 40% bonds ten years ago could now be holding more than 80% in equities. This significant shift exposes you to a higher level of risk than you may have originally intended.
Another critical area to examine is your exposure to international markets. While US stocks have enjoyed a long run of outperformance, international equities have led the way in 2025. This means your portfolio might be lacking crucial global diversification. Morningstar suggests that keeping about a third of your equity exposure outside the US is a reasonable benchmark.
Further imbalances are common. Over the past three years, growth stocks have gained nearly twice as much as value stocks. Additionally, specialised assets like gold and bitcoin have seen recent run-ups, potentially leaving you overweight in these volatile areas.
Practical Steps for Effective Rebalancing
Once you have assessed your allocations, the next step is to decide where to make adjustments. Remember, you do not need to rebalance every single account; the overall asset mix across all your holdings is what determines your risk and return profile.
For maximum tax efficiency, focus on making changes within tax-deferred accounts like an ISA, SIPP, or workplace pension. Trades within these wrappers will not trigger immediate capital gains taxes. For example, if you are overweight on US stocks, you could sell a portion and use the proceeds to buy an international stock fund within your pension.
If you must rebalance within a taxable General Investment Account (GIA), consider offsetting any realised capital gains by selling holdings that are sitting on a loss. Be warned, this can be challenging in a strong market. As of 30 October 2025, only a few Morningstar Categories, including India equity and real estate, had posted losses over the preceding 12 months. Long-term government-bond funds, however, have lost about 8% per year for the trailing five-year period, presenting a potential opportunity for tax-loss harvesting.
Smart Strategies for UK Investors
There are other clever ways to bring your portfolio back into line. If you are subject to withdrawals, you can use this as a chance to rebalance. You have the flexibility to sell assets that have appreciated the most to meet your cash needs, thereby trimming your overweight positions.
Another simple yet effective tactic is to funnel any new contributions or monthly investments into the asset classes that are currently underweight in your portfolio. While this approach may take time, depending on the size of your investments, it is far better than not rebalancing at all. This method is particularly appealing if you have built up significant capital gains that you are reluctant to realise and be taxed on.
Rebalancing is a crucial discipline for selling high and buying low. It may not always boost your returns, but it is an essential tool for controlling your portfolio's risk, a priority for any investor, especially those approaching retirement.
