Rebalancing Your Portfolio After a Volatile Year

You built your retirement portfolio with intention. Maybe you decided on 60% growth assets and 40% defensive. Or perhaps 70/30. The specific numbers mattered less than the principle: you chose an asset allocation that matched your timeframe, your sleep-at-night factor, and your goals.

Then the market did what markets do. Growth assets surged or slumped. Defensive holdings stayed steadier. And suddenly, without you touching a thing, your portfolio's shape changed. This drift isn't a failure of planning. It's the natural result of different assets moving at different speeds.

The question isn't whether your portfolio will drift, it's what you do about it. And when you're within 10-15 years of retirement, that answer matters more than ever.

When you're 35 with 30 years until retirement, a portfolio that drifts from 80/20 to 85/15 rarely causes sleepless nights. You have three decades for any bumps to smooth out. Time is your buffer.

At 55 with a decade to go? Different story. That same drift could mean you're carrying significantly more risk than you planned for, right when sequence of returns risk starts to matter. If the market drops 20% and you're overweight in growth assets, you don't just lose more money on paper. You lose something more valuable: time to recover before you need to start drawing income.

A real example helps. Imagine you planned for a 60/40 portfolio worth $400,000. After a strong year for shares, it drifts to 68/32 and $440,000. Sounds great, right? But you're now carrying an extra $32,000 in growth assets compared to your plan. If growth assets drop 25% (not unusual during market corrections), that's an $8,000 larger loss than you budgeted for. That difference compounds when you're close to needing the money.

The closer you get to retirement, the less your portfolio is about maximising growth and the more it's about managing risk you can't afford to take.

Portfolio drift is simple maths, but it's worth understanding the mechanics. Different assets grow (or shrink) at different rates. Over time, the faster-growing assets become a bigger slice of your portfolio, even if you never buy more of them.

Let's say you start the year with $100,000 split as follows:

• Growth assets (NZ and international shares): $60,000
• Defensive assets (bonds and cash): $40,000

Growth assets return 15% for the year ($9,000 gain). Defensive assets return 4% ($1,600 gain). By year-end, you have $110,600 total, but your split is now:

• Growth: $69,000 (62.4% of portfolio)
• Defensive: $41,600 (37.6% of portfolio)

You've drifted from 60/40 to roughly 62/38. Not dramatic, but meaningful. Do nothing for another year with similar returns, and the drift accelerates. After three years of this pattern, you might be at 65/35 or beyond.

The reverse happens after a bad year for shares. A 15% drop in growth assets while defensive holdings stay flat will push you toward a more conservative position than you intended. Both directions matter, particularly if they leave you positioned wrong for what comes next.

Rebalancing doesn't require complex software or constant monitoring. What it requires is a process you'll actually follow. Here's a framework that works for most pre-retirees.

You can't rebalance without knowing what you're rebalancing to. Your target allocation is your north star. Common allocations for investors 10-15 years from retirement fall somewhere between 50/50 and 70/30 (growth/defensive), though individual circumstances vary widely.

Factors that may influence this decision include your risk tolerance, other income sources in retirement (rental property, part-time work), the size of your portfolio relative to your needs, and your health and family longevity. This is exactly the type of question worth discussing with a licensed Financial Advice Provider, who can help you think through the trade-offs specific to your situation.

Set a calendar reminder for the last week of March, June, September, and December. When it pings, log into your investment accounts (KiwiSaver, any brokerage accounts, managed funds) and calculate your actual allocation.

Most platforms show this automatically. If yours doesn't, you'll need to:

• Add up the total value of growth assets (shares, growth funds, aggressive/balanced funds)
• Add up defensive assets (bonds, cash, conservative funds)
• Divide each by your total portfolio value

Write it down. A simple spreadsheet works perfectly. Over time, you'll see patterns in how your portfolio drifts and whether your rebalancing approach is working.

You don't need to rebalance every time your portfolio drifts by half a percent. Transaction costs, tax implications, and time investment all argue for letting some drift happen. The question is: how much?

A common threshold is 5 percentage points from your target. If you're targeting 60/40 and drift to 65/35 or 55/45, you rebalance. Some investors use a lower threshold (3 percentage points) if they're very close to retirement or particularly risk-averse. Others use 10% for smaller portfolios where transaction costs matter more.

Research from Sorted.org.nz suggests that the specific threshold matters less than having one and sticking to it. The discipline is the point, not perfection.

When you've hit your threshold, you need to bring things back to target. You have three main options:

Option A: Sell the overweight assets, buy the underweight ones. This is pure rebalancing. If growth assets have run up to 68% and you want 60%, you sell some shares and buy bonds or cash equivalents. Clean and precise, but it may trigger tax on gains if you're outside KiwiSaver (more on this below).

Option B: Direct new contributions to underweight assets. If you're still working and contributing regularly to KiwiSaver or other investments, you can rebalance passively by directing new money to whatever's lagging. This takes longer but avoids selling anything. It works best when drift is modest and you're adding meaningful amounts regularly.

Option C: Combine both approaches. Use new contributions to close some of the gap, then sell/buy to finish the job. This minimises transaction costs and tax impact while still getting you back on target within a reasonable timeframe.

Which option you choose depends on your tax situation, whether you're still contributing, and how far you've drifted. There's no universally "right" answer, but the key is to complete the rebalance once you've started the process.

This is where the New Zealand tax system creates an interesting split in how you think about rebalancing.

Inside KiwiSaver: Your provider handles all the tax through the Portfolio Investment Entity (PIE) regime. When you switch funds within KiwiSaver (say, from Growth to Balanced, or by manually adjusting allocations if your provider allows it), you're not triggering a taxable capital gain. The PIE tax is calculated based on income, not on your trading activity. This makes KiwiSaver an excellent environment for rebalancing. You can move between funds as often as needed without worrying about creating a tax bill.

Outside KiwiSaver: Different rules apply. New Zealand doesn't have a broad capital gains tax, but there are important exceptions. If you're trading shares frequently (the "trader" test), IRD may consider your gains taxable income. For most buy-and-hold retirement investors, this isn't an issue, but annual rebalancing sits in a grey area worth understanding.

Additionally, if you hold international shares directly (not through a PIE fund), you'll need to consider the Foreign Investment Fund (FIF) rules. Under FIF, you may owe tax on deemed income regardless of whether you sell, which affects the rebalancing calculation.

The practical takeaway: rebalancing is simplest and most tax-efficient inside KiwiSaver or other PIE vehicles. If you're holding investments outside these structures, consider whether rebalancing is worth the complexity or whether passive rebalancing through new contributions makes more sense.

Volatile years, by definition, create more frequent rebalancing opportunities. When shares drop 15% in a quarter, your portfolio probably drifts toward defensive. When they surge 20%, you drift toward growth. Both create chances to rebalance.

Here's the powerful bit: disciplined rebalancing forces you to buy low and sell high. When shares have dropped and your portfolio is now too conservative, rebalancing means buying more shares at lower prices. When shares have surged and you're too aggressive, you're selling at higher prices. You're essentially being a contrarian investor without needing to time the market or make predictions.

This runs counter to instinct. After shares drop, buying more feels scary. After they surge, selling feels like leaving money on the table. But the maths is clear: maintaining your target allocation over time tends to produce better risk-adjusted returns than letting winners run indefinitely or panic-selling losers.

A volatile year isn't a crisis for your retirement plan. It's a chance to practice the discipline that separates steady accumulators from emotional reactors.

If most of your retirement savings sit in KiwiSaver, you might be wondering whether switching funds counts as rebalancing. Short answer: sometimes, but it's clunkier than rebalancing a self-directed portfolio.

KiwiSaver funds (Growth, Balanced, Conservative, etc.) are pre-mixed allocations. A Balanced fund might be 60% growth/40% defensive, but you can't tweak that mix yourself. You can only switch to a different fund with a different pre-set mix. This means rebalancing in KiwiSaver often means switching your entire balance from one fund to another.

For example, if you're in a Growth fund (typically 80%+ growth assets) and you've decided you want a more moderate 60/40 allocation as retirement approaches, you'd switch to a Balanced fund. That's a form of strategic rebalancing, though it's a bigger, less granular move than selling 10% of your shares to buy bonds.

Some newer KiwiSaver providers allow more customisation, letting you build your own allocation across multiple funds. If your provider offers this, you can rebalance more precisely by shifting money between underlying options.

The limitation: most providers allow only a few switches per year without fees, and the funds themselves rebalance internally anyway. Your main job is ensuring you're in the right fund for your stage of life, which you can review using resources like this guide to fund selection.

Even with a solid process, it's easy to fall into traps that undermine your rebalancing discipline. Watch for these:

Rebalancing too often. Checking your portfolio daily and rebalancing every week creates transaction costs, potential tax issues, and emotional exhaustion. Quarterly checks with threshold-based rebalancing keep you engaged without becoming obsessive.

Abandoning the process during extremes. When markets crash 30%, rebalancing means buying assets that just lost a third of their value. It feels insane. But this is precisely when discipline matters most. If your process says rebalance at 5% drift, honour it regardless of headlines.

Confusing rebalancing with changing your plan. Rebalancing returns you to your target allocation. Changing your allocation because you're scared or greedy is something else entirely. If you're genuinely reconsidering your risk tolerance, that's a separate, more fundamental decision that warrants careful thought or professional advice.

Ignoring costs. Selling and buying incurs costs: brokerage fees, fund switching fees, potential tax, and bid-ask spreads. On a $50,000 portfolio, even 0.5% in total costs is $250. Make sure the rebalancing is meaningful enough to justify the expense.

Forgetting to check everything. If you have money in KiwiSaver, a managed fund, some direct shares, and a term deposit, you need to look at the whole picture. Rebalancing just your KiwiSaver while ignoring the rest gives you a false sense of control.

The hardest part of rebalancing isn't the maths or the logistics. It's sticking with it when your brain screams at you to do something else. After a great year, selling winners feels like self-sabotage. After a terrible year, buying losers feels reckless.

But retirement planning is a long game. You won't win by predicting the next market move or by being cleverer than everyone else. You'll win by having a sensible plan and following it even when it's uncomfortable. Rebalancing is one of the few truly disciplined, emotion-proof strategies available to individual investors.

Your portfolio will drift. The market will swing. Your job is to check regularly, rebalance when thresholds are hit, and trust the process. Do that, and volatile years become opportunities rather than crises.

This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.