Rebalancing: Once a Year, Realign Your Drifting Asset Mix

Even a portfolio you neatly split into 'stocks 6 : bonds/deposits 4' at the outset will see its proportions drift on their own after just one year. Assets that rise well grow their share automatically, while assets that fall shrink. Rebalancing is the periodic check-up that returns these drifted proportions to 'the target ratio I set at the start.' It is less a grand trading technique and more a habit of glancing at your account once a year.

Why does the allocation drift on its own?

Suppose you started with 10 million KRW split as 'stocks 6 million KRW (60%) : safe assets 4 million KRW (40%).' If a year later stocks rose 25% to 7.5 million KRW while safe assets stayed at 4 million KRW, then of the total 11.5 million KRW, stocks now make up about 65% and safe assets about 35%. Without intending to, your portfolio has shifted into 'a more aggressive portfolio with a 65% stock weighting.' The key point is this: the better the market does, the more your risky-asset share quietly swells.

What rebalancing does: automatic 'sell high, buy low'

To get back to 60:40 in the case above, you keep only 6.9 million KRW - 60% of the total 11.5 million KRW - in stocks and move the rest (about 600,000 KRW) into safe assets. The result is stocks 6.9 million KRW (60%) : safe assets 4.6 million KRW (40%). In effect, this is the act of 'trimming part of the stocks that rose a lot (taking profits) and topping up the relatively cheaper safe assets.' It amounts to a rule that automatically and mechanically 'sells what's expensive and buys what's cheap,' without being swayed by emotion.

Method 1 - Periodic rebalancing (calendar-based)

The easiest approach is to fix a date. Pick one day you 'won't forget' - the first week of every January, or your birthday or the year-end tax-settlement season - and check your allocation only then. Once a year means few transactions, so fees and taxes are light, and you'll fret less from watching the market every day. The newer you are to investing, the more comfortable this 'fixed once-a-year' approach feels.

Method 2 - Band (tolerance range) rebalancing

Alternatively, you can set a range such as 'adjust only when it diverges from the target weighting by 5 percentage points or more.' If your target is 60% stocks, you leave it alone anywhere within 55-65% and only touch it when it breaks out of that band. Since you do nothing in normal times and move only when the market swings sharply, this curbs unnecessary frequent trading while still preventing the allocation from skewing. Many people also use a compromise that combines the two: 'check once a year, but only actually trade when the band is breached.'

The two methods at a glance

• Periodic (calendar) method: check on the same day every year, the rule is simple and you won't forget. But you still have to look even when the allocation is perfectly fine.
• Band (±%p) method: trade only when it strays a set margin from the target, so trading is efficient. But you have to check the allocation often and set the threshold yourself.
• Compromise: 'check once a year + trade only when the band is exceeded' - the most manageable combination for beginners.

Where to save on taxes and fees: using pension accounts

If you rebalance by selling stocks or funds in a regular account, taxes may apply to the trading gains or fees may arise. By contrast, within pension accounts such as a pension savings account or IRP, no tax is withheld at the time of the trade as long as you don't break the account (tax deferral), making allocation adjustments far lighter. On top of that, pension savings + IRP offer a tax credit on annual contributions of up to 9 million KRW (credit rate of about 13.2-16.5%, varying by your total salary level), so the same effort lets you capture tax savings and rebalancing at once. That said, ISA and pension accounts have their own conditions for early withdrawal and cancellation, so be sure to check the terms before signing up.

Rebalancing in 5 practical steps

1. Write down your target allocation in words - e.g., stocks 60% / safe assets (bonds, deposits) 40%.
2. Once a year, on your set date, calculate your actual allocation based on current market values.
3. Check how far it has drifted from the target (for the band method, whether it exceeds ±5%p).
4. Trim the assets that rose a lot and move the proceeds toward the assets that shrank, matching the target allocation.
5. Start with pension accounts where taxes and fees are light; if that's hard, you can simply top up only the lacking side with 'new money you add.'

Points to watch out for

Rebalancing is less 'magic that maximizes returns' and more 'a seatbelt that keeps risk tied down to a level you can bear.' In a strong bull market, selling off the well-rising assets early may leave you with smaller gains. Even so, it is meaningful for long-term investors in that it prevents the allocation from skewing to one side and getting badly hurt in a crash. Doing it too often only piles on fees and taxes, so about 'once a year' is appropriate.

Rebalancing is not a technique for earning more, but a habit for being shaken less.

In short, rebalancing is a simple rule that, once a year, returns your assets to 'the ratio I set at the start' to prevent risk from skewing, automatically trimming what's expensive and topping up what's cheap. Write down your target allocation, and mark just one check-up date on your calendar. This article is for reference to explain asset-management concepts and does not recommend buying or selling any specific product. Decide your actual investment weightings and products yourself, taking into account your own risk tolerance, time horizon, and tax situation.