Rebalancing: Resetting Your Drifted Asset Allocation Once a Year

Even a portfolio that starts neatly divided as “stocks 6 : bonds/deposits 4” can drift out of balance after just one year. Assets that rise grow larger on their own, while assets that fall shrink. Rebalancing is the regular checkup that brings those shifted weights back to “the target ratio I originally set.” It is less a grand trading technique and more a habit of reviewing your accounts once a year.

Why do allocations drift on their own?

Suppose you start with 10 million won split as “stocks 6 million won (60%) : safe assets 4 million won (40%).” If stocks rise 25% after one year to 7.5 million won while safe assets remain at 4 million won, stocks become about 65% and safe assets about 35% of the total 11.5 million won. Without intending to, you have ended up with a more aggressive portfolio with a 65% stock allocation. The key point is that the better the market performs, the more quietly your risky-asset allocation grows.

What rebalancing does: automatically “sell high and buy low”

To bring the example above back to 60:40, you would keep only 6.9 million won, or 60% of the total 11.5 million won, in stocks and move the rest, about 600,000 won, into safe assets. The result is stocks 6.9 million won (60%) : safe assets 4.6 million won (40%). In effect, you are trimming part of the stocks that rose a lot, realizing gains, and filling up relatively cheaper safe assets. It is a mechanical rule that automatically makes you “sell what has become expensive and buy what has become cheap” without being swayed by emotion.

Method 1 — Periodic rebalancing, based on the calendar

The easiest method is to choose a date. Pick one day you will not forget, such as the first week of January each year, your birthday, or tax settlement season, and check the allocation only then. Once a year means fewer trades, lower commission and tax burden, and less need to stare at the market every day and feel anxious. For beginners, this “fixed once-a-year” method is the most comfortable.

Method 2 — Band, or tolerance-range, rebalancing

You can also set a range, such as “adjust only when the allocation moves more than ±5 percentage points away from the target.” If your target is 60% stocks, you leave it alone within 55-65% and intervene only when it moves outside that band. Since you do nothing most of the time and act only when the market moves sharply, it reduces unnecessary frequent trading while preventing the allocation from becoming too concentrated. Many investors also use a compromise: check once a year, but actually trade only if the allocation has crossed the band.

Comparing the two methods at a glance

• Periodic, calendar-based method: check on the same day each year → the rule is simple and hard to forget. However, you still have to review it on that date even if the allocation is fine.
• Band, ±%p method: trade only when the allocation moves a set distance away from the target → transactions are efficient. However, you need to check the allocation regularly and set the threshold yourself.
• Compromise: “annual check + trade only when the band is exceeded” → the most practical combination for beginners.

Where to save on taxes and fees: use pension accounts

If you rebalance by selling stocks or funds in a regular account, gains may be taxed or fees may be charged. By contrast, inside pension accounts such as pension savings accounts or IRP accounts, tax is not collected at the time of trading as long as you do not close the account, due to tax deferral, making allocation adjustments much lighter. In addition, pension savings plus IRP offer tax credits on annual contributions of up to 9 million won, with a credit rate of about 13.2-16.5% depending on total salary level, so you can pursue tax savings and rebalancing with the same effort. However, ISA and pension accounts have separate conditions for early withdrawal and cancellation, so be sure to check the terms before signing up.

Five practical steps for rebalancing

1. Write down your target allocation — for example: stocks 60% / safe assets (bonds/deposits) 40%.
2. Once a year, on the date you set, calculate the actual allocation based on current market value.
3. Check how far it has moved away from the target, or whether it exceeds ±5%p if using the band method.
4. Trim assets that have risen a lot and move the money toward assets that have shrunk, bringing the portfolio back to the target allocation.
5. Start with pension accounts where taxes and fees are lighter, and if selling feels difficult, you can simply direct new contributions toward the underweight side.

Points to watch

Rebalancing is not “magic that maximizes returns”; it is closer to a “seat belt that keeps risk within a level I can handle.” In a strong bull market, you may sell rising assets early and earn less as a result. Even so, it matters for long-term investors because it helps prevent serious damage in a crash when the allocation has become concentrated on one side. If you do it too often, fees and taxes can simply increase, so around “once a year” is reasonable.

In short, rebalancing is a simple rule that once a year returns your assets to “the ratio you originally set,” prevents risk concentration, and automatically trims what has become expensive while adding to what has become cheap. Write down your target allocation and mark one review date on your calendar. This article is for reference to explain asset management concepts and does not recommend buying or selling any specific product. Actual investment allocations and products should be decided by you after considering your own risk tolerance, investment horizon, and tax situation.