🧠 Why sell what's working?

Counter-intuitive but necessary?

Author

Nessrine Slimani
January 15, 2026

January is review time. I took a look at my investment portfolio: +44%.

(Everyone's a "genius" in a bull market, my only real achievement was staying calm when the markets got choppy.)

But beyond the performance, I asked myself: does my portfolio still look like what I originally planned?

Because over time, markets move and your portfolio allocation drifts.

  • Shares rise faster than bonds.
    A 60/40 portfolio can easily become 70/30 after a few good years.

  • One geographic region outperforms and suddenly represents 60% of your portfolio instead of 40%.

  • Same goes for a sector or industry, it can grow to take up more space because of its exceptional returns.

The key question:
Are you still comfortable with this new level of risk?

Selling what's working to buy what's doing less well seems like the opposite of what you should do. Yet this is what Vanguard, Morningstar, and all asset allocation experts recommend.

  • Why sell part of your winning investments?

  • How often should you do it?

  • And when is it really necessary?

Let's dive into this in today's newsletter.

Why we don't rebalance (even when we know we should)

As we saw in the intro, your portfolio can gradually drift away from your risk profile without you noticing.

Yet even when someone explains this logical argument, we're reluctant to rebalance. Why is that?

Because of certain behavioural biases that mislead us:

  1. "What worked recently will keep working"

    This is a misleading shortcut. We project past performance into the future. Tech shares have performed brilliantly? We want more. Bonds have stagnated? We want to dump them.

  2. "If I sell my winners, I might miss out on what comes next"

    This fear of missing out (FOMO) combined with loss aversion creates a double block. On one hand, the thought of missing future gains hurts. On the other, the potential pain of "losing" (by missing gains) feels psychologically stronger than the benefit of reducing risk.


    If I sell my shares today and they keep rising for the next 12 months, I'll feel stupid. So I'd rather do nothing.

  3. "My shares that performed well are worth more than the others"

    This is the endowment effect: we overvalue what we already own. Selling them, even partially, feels more painful.

All these mechanisms pile up, so we end up doing nothing.

Meanwhile, the portfolio drifts. From 60/40 to 70/30, then 75/25.
We accumulate more and more risk without really noticing.

Until the day the market drops.

So when and how should you rebalance?

"The main benefit of rebalancing is risk reduction. You have a system in place that allows you to periodically reduce the asset classes that have performed very well (and are often overvalued) and add to those that haven't performed as well (and often have more attractive valuations)."

Her recommendation:
- Check once a year
- Or rebalance when your allocation is 5 to 10 points off target

Let's say you're aiming for a 60/40 allocation (shares/bonds):
- If you find yourself at 65/35
→ this is the minimum threshold where rebalancing should be considered.
 
- If you're at 61/39
→ the gap is small and rebalancing isn't necessary.

Why not rebalance more often?

Because rebalancing has a cost.

Option 1: Rebalance by selling

The catch is that selling at a profit can create a tax liability, depending on the tax wrapper you're using.

  • Depending on your country and account type, rebalancing in tax-advantaged accounts might not trigger tax as long as the money stays within the account, unlike general investment accounts.

  • Depending on your broker, there will also likely be transaction fees.

This is why limiting yourself to rebalancing once a year limits not only transaction costs but also the tax impact.

Option 2: Rebalance by redirecting future contributions

If you've identified that rebalancing is needed but don't want to trigger a tax bill, you can keep investing monthly but redirect these new contributions only towards the investment you want to build up (bonds in our example). This lets you restore the balance that matches your risk profile.

This method is slower but works well if you're investing regularly and the gap isn't too large. It's particularly suitable for general investment accounts with no tax advantage.

What if I never rebalance?

In their study "Here's why you should rebalance" (2020), Morningstar tracked a 60/40 portfolio over 10 years without rebalancing.

It shifted to 80/20 by 2019.

The closer you get to your financial goal, the more you want to protect your capital. Markets are unpredictable and can fall for extended periods. As we've seen in previous editions, some downturns can last over 5 years.

That's a long time.

Key takeaways

Rebalancing is counter-intuitive at first: selling what's working to buy what's stagnant goes against all our natural instincts.

But for many individual investors, not rebalancing means taking on more and more risk without consciously deciding to.

And unfortunately, when markets fall, you end up in a worse situation than expected.

The solution: check once a year, and seriously consider rebalancing when your allocation is 5 to 10 points off your initial strategy.

Either by selling holdings (watch out for fees and tax costs), or by redirecting your new contributions to rebalance without triggering tax (but do check the tax rules for your specific situation before acting).

Markets will keep moving. We fix the roof before the storm, not during it.
Feel free to let me know what you thought of this week's edition!

Take care,
Nessrine

Where are you with today's topic?

Login or Subscribe to participate in polls.

Articles, research and studies consulted for this edition:

Reply

or to participate.