Why a portfolio drifts on its own

A portfolio built as 60% stocks and 40% bonds does not stay 60/40. The two asset classes earn different returns: after a year in which stocks rise 20% and bonds stay flat, the same portfolio sits at 64/36 without you touching anything. After a few good years it can reach 70/30, and with it a level of risk you never chose. Rebalancing means bringing the weights back to target: selling some of what has grown and buying what has fallen behind.

The question this calculator answers is not whether to rebalance, but how much it costs to do it by selling — and how much new money you would need to do it without selling anything. It works in any currency: every monetary result is expressed in the same unit as the portfolio value you enter.

How the calculator works

You enter five figures: the portfolio value V, the current stock weight w, the target weight t, the cost per trade f (commission plus spread, as a % of the amount traded) and the tax on the sale k (as a % of the amount sold). The calculation takes four steps:

• Drift: d = w − t, in percentage points.
• Amount to move: T = V × |d| / 100. This is how much of the overweight asset you sell and how much of the underweight one you buy.
• Cost: C = T × (2f + k) / 100. The trading cost is paid twice (sale and purchase), the tax only on the leg you sell.
• Zero-cost contribution: C* = V × |d| / t_over, where t_over is the target weight of the overweight asset.

The verdict is based on the cost as a percentage of the portfolio, |d| × (2f + k) / 100: a dimensionless measure that reads the same for an account of ten thousand or ten million.

The two parts of the cost: friction and tax

The cost of rebalancing by selling has two components of a different nature. The first is market friction: broker commissions and the gap between the buying and selling price (the spread). With online brokers and the most traded ETFs it is often between 0% and 0.2% per trade today. The second is capital-gains tax: if you sell a position at a gain, many countries tax the realised gain.

The two parts do not behave the same way. Friction is a real, final cost. The tax is partly a cost brought forward: a gain you do not realise today would still be taxed when you eventually sell. Selling now, however, gives up the tax deferral — the return that money would have kept earning — and the calculator counts it as a full cost because it is money leaving the portfolio now.

Why the tax usually outweighs the commission

The table shows the cost, as a % of the portfolio, of correcting a 10-point drift under different combinations of trading cost and tax on the sale.

Read down the rows: moving from an expensive broker to a free one shifts the cost by a few hundredths of a point. Read across the columns: the tax multiplies it. Choosing a platform to save on commissions optimises the small item. The big lever is how much gain you realise, and that depends on how you rebalance, not where.

The zero-cost route: rebalancing with contributions

If you add money to the portfolio regularly, you can correct the drift without selling anything: send every new contribution to the underweight asset until the weights are back on target. No tax, and the friction is paid only on purchases you would have made anyway. The same goes for dividends and coupons: reinvesting them in the underweight asset, rather than where they were paid, is free rebalancing.

The calculator tells you how much new money it takes to do this in one go. If a few months of your contributions cover that figure, you can probably avoid selling altogether.

The new-money multiplier

Here is the surprise: to get back to target without selling you need more new money than the amount you would move by selling. Fresh money does not take weight away from the overweight asset, it only dilutes it, and dilution takes mass. The ratio is exactly 100 / t_over, where t_over is the target weight of the asset that has grown too much.

The same 5-point drift costs five times as much in new money when the asset that grew too much has a small target. In a 60/40 portfolio this is the typical case after a bad year for stocks: bonds are overweight, their target is 40%, and you need 2.5 times the amount to move. Contributions work very well for small, recurring drifts; for large ones, especially on the minority asset, they are often not enough.

When to rebalance: calendar or threshold

There are two approaches. Calendar rebalancing brings the weights back to target on fixed dates, for example once a year. Threshold rebalancing acts only when the drift exceeds a tolerance band, for example ±5 points. Practical research tends to show that thresholds produce fewer trades for the same risk control, because they leave the portfolio alone when the weights are already close to target.

The calculator fits both: its verdict tells you whether, at today's cost, rebalancing by selling is noise or an expense to avoid. With a cost below 0.1% of the portfolio the band can be tight; above 1% it pays to widen it and leave more room for contributions.

Partial rebalancing

You do not have to go back exactly to target. A common technique is to bring the weight back only to the edge of the tolerance band: if the target is 60%, the band is ±5 and you are at 68%, you sell down to 65% rather than 60%. The cost scales linearly with the points corrected, so correcting 3 points instead of 8 costs 62.5% less, and the remaining risk stays inside the range you had decided to tolerate.

To estimate it with the calculator, enter the edge of the band as the target weight instead of the real target.

How to estimate the tax on the sale

The input k is not the tax rate: it is the tax as a percentage of the amount sold. You get it by multiplying your country's capital-gains rate by the share of gain contained in the sale price. If a position bought at 60 is worth 100 today, the gain is 40% of the price; at a 26% rate the tax is 10.4% of what you sell.

The rules vary widely between countries: different rates by holding period, annual allowances, offsetting against losses, different methods for the cost basis. The calculator assumes none of them: it uses the value of k you derive from your own situation. Selling a position at a loss, for example, gives k = 0.

Where to rebalance: tax-advantaged accounts

Many countries offer tax-advantaged wrappers, such as retirement accounts or savings plans, inside which selling and buying back does not trigger immediate tax. If your wealth is split between a taxable account and a sheltered one, the cheapest place to rebalance is almost always the sheltered one: there k = 0 and the cost shrinks to friction alone. The calculator lets you compare the two cases by changing a single input.

A complete example

A portfolio of 100,000 with a 60% stock target, now at 68%. Cost per trade 0.1%, tax on the sale estimated at 8% of the amount sold. The drift is 8 points, so 8,000 must be moved. The cost is 8,000 × (0.2% + 8%) = 656, or 0.656% of the portfolio. The tax weighs 40 times the commissions. To rebalance without selling you would need 13,333 of new contributions, all into bonds: 1.67 times the amount to move. With a partial rebalance down to 65% (the edge of a ±5 band) the cost falls to 246.

Limits of the calculator

The model considers two asset classes, stocks and a defensive component, and works for any other pair as well (for example developed and emerging-market stocks). It applies the same cost per trade to both legs and an average tax to the leg sold, without going lot by lot. It does not estimate the risk benefit of rebalancing, which depends on future market volatility and cannot be computed in advance: it tells you what it costs to regain control, while the decision to do so stays yours. It is not financial or tax advice.

Frequently asked questions

What is portfolio rebalancing?

It is bringing the weights of your asset classes back to the target you chose, either by selling some of what has grown most and buying what has fallen behind, or by sending new contributions to the underweight asset.

How is the cost of rebalancing calculated?

The amount to move is the portfolio value times the drift in points. The cost is that amount times twice the cost per trade (sale and purchase) plus the tax on the sale as a percentage of the amount sold.

What should I enter as the tax on the sale?

Not the tax rate, but the tax as a percentage of the amount sold: your country's capital-gains rate times the share of gain in the price. With a 26% rate and a gain equal to 40% of the price, enter 10.4.

Why does rebalancing without selling need more money than the amount to move?

Because new money does not shrink the overweight asset: it dilutes it by growing the total. The contribution needed is the amount to move divided by the target weight of the overweight asset, so 1.67 times with a 60% target and 2.5 times with a 40% target.

How often should I rebalance?

There is no frequency that is right for everyone. Threshold rebalancing, which acts only when drift exceeds a band such as ±5 points, tends to need fewer trades than calendar rebalancing for the same risk control.

What is a tolerance band?

It is the range around the target within which you accept that weights move without acting. With a 60% target and a ±5 band, you rebalance only if stocks fall below 55% or rise above 65%.

Do I have to go back exactly to target?

No. Bringing the weight back only to the edge of the band reduces the cost in proportion to the points you leave uncorrected. To estimate it, enter the edge of the band as the target weight.

Does the calculator work in any currency?

Yes. Monetary results are in the same unit as the portfolio value, and the verdict is based on cost as a percentage of the portfolio, which depends neither on the currency nor on the size of the account.

Can I use it for assets other than stocks and bonds?

Yes, for any pair of asset classes: developed and emerging stocks, ETFs and cash, two different funds. Enter the current and target weights of the first one.

Does selling a position at a loss cost anything?

It usually triggers no tax, so the tax on the sale is zero and only the friction of commissions and spread remains. In many countries the loss can also offset future gains.

Is it better to rebalance inside a tax-advantaged account?

Where your country offers one, yes: inside retirement accounts or sheltered plans selling triggers no immediate tax, so the tax on the sale is zero and the cost shrinks to commissions alone.

Is this calculator financial advice?

No. It estimates the cost of a transaction from the figures you enter and does not assess the risk benefit. For tax or investment decisions, consult a licensed professional in your country.