Adjusting the Sails Strengthens Long-Term Wealth

“Little by little, a little becomes a lot.” (Tanzanian proverb)

One of the most important drivers of long-term investment success is keeping your asset allocation aligned with your goals and risk tolerance. The challenge is that neither markets nor life stand still. Over time, both your circumstances and your portfolio will drift from the original plan.

Think of a long sea voyage. You can set the sails at the beginning, but you can’t disappear below deck for three months. Winds shift, currents change, and the course needs to be adjusted periodically to stay on track. In investing, this process is known as rebalancing.

Building the initial portfolio

When you begin working with a financial planner, the process starts with understanding your full financial picture. This includes your assets, income, liabilities, time horizons, and your comfort level with investment risk.

Using this information, your portfolio is constructed across a range of asset classes, each with different expected returns and levels of volatility. The goal is to create a portfolio that supports your financial objectives while managing the level of risk you are prepared to take.

But even a perfectly constructed portfolio will not stay perfectly balanced.

Understanding portfolio drift

Different investments rarely (if ever) grow at the same pace. Over time, stronger-performing assets begin to occupy a larger portion of the portfolio, while weaker performers shrink. This gradual shift is known as portfolio drift.

For example, if equities perform particularly well over several years, they may grow to represent a much larger portion of your portfolio than originally intended. While that might feel rewarding during strong markets, it can expose you to far more risk than you originally planned.

Rebalancing is the process of periodically restoring your portfolio to its intended asset allocation. It helps ensure that your investment strategy remains aligned with your short, medium and long-term objectives.

The hidden tax opportunity

The annual capital gains tax (CGT) exclusion, recently raised to R50,000 per individual per year, throws you a tax-free bone. By strategically realising gains up to this annual limit and reinvesting the proceeds, investors can gradually increase the base cost of their portfolio. Over time, this reduces the capital gain that will eventually be taxed when the portfolio is liquidated.

If you don’t take advantage of the annual CGT exclusion for years or even decades you could be in for a nasty surprise when you eventually sell.

Are there any downsides?

One common concern is that rebalancing may involve trimming investments that are still performing strongly. However, the goal of rebalancing is not to predict which assets are going to go up or down. Instead, it’s about managing the portfolio's overall risk. It systematically locks in gains from assets that have run ahead and reallocates capital to areas that may be under-represented.

You might worry about triggering CGT when selling investments, but the annual R50,000 exclusion exists precisely to allow investors to realise a portion of gains each year without immediate tax consequences. Please remember that the R50,000 exclusion applies to total capital gains across all assets, including property or business interests.

How rebalancing works in practice

If your investments are held on a LISP (Linked Investment Service Provider) platform, rebalancing typically involves adjusting the percentage allocation of each investment within the portfolio.

Rebalancing can also occur naturally when making additional contributions or withdrawals. New investments can be directed toward underweight assets, while withdrawals can be taken from areas that have grown disproportionately.

The bottom line

Rebalancing is a disciplined way of bringing your portfolio back in line with your objectives. It helps manage risk, introduces additional structure into the investment process, and can also reduce future capital gains tax.

We’d love to chat about how this applies to your portfolio.