Rebalancing in practice — discipline first, taxes second
Rebalancing requires fixed rules
In theory, rebalancing is simple: you bring the portfolio back to your chosen allocation.
In practice, the hard part isn’t how, but when.
Without fixed rules, rebalancing can slide from disciplined risk management into gut-feel and ad hoc decisions.
Rebalancing should follow rules — not mood.
That’s why any rebalancing strategy should start with clear thresholds, decided in advance.
Why small deviations are rarely worth acting on
In academic models, portfolios are often rebalanced at very small deviations.
In the real world, that typically means:
- frequent trades
- more realizations
- and higher friction
So the key question becomes:
When is a deviation large enough that it can realistically be worth acting?
Rule of thumb 1: think in percentage points — not percentages
A robust, disciplined approach is to measure deviations in absolute percentage points.
Example (target: 60% stocks / 40% bonds):
| Situation | Stock allocation | Deviation |
|---|---|---|
| Start | 60% | 0 |
| Moderate rise | 63% | +3 percentage points |
| Strong rally | 70% | +10 percentage points |
Many long-term strategies use thresholds such as:
- ±5 percentage points (more active)
- ±10 percentage points (low trading frequency)
The rule is simple, transparent, and independent of market sentiment.
Rule of thumb 2: compare expected benefit to a certain cost
Rebalancing reduces risk, but rarely produces a large excess return on its own.
So you should always set up a simple calculation.
Example
Assume:
- Portfolio: DKK 1,000,000
- Target: 60/40
- Stock allocation has risen to 70%
- You’d need to sell DKK 100,000 of stocks to rebalance
If selling triggers tax of e.g. 27%, the cost is:
- DKK 27,000 in certain, realized tax
For the rebalance to have a positive net effect, it must:
- reduce future losses
- or improve returns
- by more than DKK 27,000 over time
For small deviations, that’s statistically uncommon.
Rule of thumb 3: the bigger the portfolio, the bigger the threshold
The same percentage deviation corresponds to very different amounts depending on portfolio size.
| Portfolio | 5% deviation | Potential tax (27%) |
|---|---|---|
| DKK 250,000 | DKK 12,500 | ~DKK 3,400 |
| DKK 1,000,000 | DKK 50,000 | ~DKK 13,500 |
| DKK 5,000,000 | DKK 250,000 | ~DKK 67,500 |
The larger the portfolio, the larger the deviation should be before a rebalance makes sense.
Time-based or threshold-based?
To avoid intuition and emotions, you should choose one clear model.
Model A: time-based
- e.g. once per year
- regardless of market moves
Pros:
- simple and predictable
Cons:
- can lead to unnecessary trades in stable periods
Model B: threshold-based
- e.g. rebalance only at ±7 or ±10 percentage points
Pros:
- fewer trades
- better aligned with real-world friction
Cons:
- requires ongoing monitoring
Taxes as friction — not as the strategy
So far we’ve discussed rebalancing without distinguishing between account types.
But in practice, taxes are the most important friction.
That doesn’t mean rebalancing is wrong — but it does mean:
- thresholds should be larger
- and rules should be more selective
The best pre-tax strategy isn’t necessarily the best after-tax strategy.
Can you realize losses to reduce tax when rebalancing?
A natural question follows:
If I have both gains and losses in the portfolio — can I realize the losses as part of rebalancing to reduce the tax bill?
The answer is: Yes, sometimes. But only if certain conditions are met.
What matters is whether:
- the losses and gains are tax-compatible
- the trades also make sense from a portfolio perspective
Three dimensions that must match
For losses to genuinely offset tax, three things need to line up:
- The same account type
- The same tax regime (mark-to-market vs realization)
- The same income category
If even one doesn’t match, the “offset” is often partly or entirely illusory.
Share Savings Account (ASK)
The Share Savings Account is a tax-contained system with mark-to-market taxation.
| Asset type on ASK | Tax regime | Can losses be offset against gains on ASK? | Comment |
|---|---|---|---|
| Stocks | Mark-to-market | âś” Yes | Net assessed annually |
| Equity ETFs | Mark-to-market | âś” Yes | Regardless of realization |
| Dividends | Mark-to-market | âś” Yes | Part of the same net result |
| Loss on ASK → gain outside ASK | — | ✖ No | No cross-offsetting |
Implication:
ASK is well suited for disciplined rebalancing, but losses there can’t help elsewhere.
Taxable brokerage account (regular account)
This is where complexity is highest.
| Asset type | Tax regime | Income category | Losses can be offset against… | Comment |
|---|---|---|---|---|
| Stocks | Realization | Equity income | âś” Other equity gains | Classic |
| Equity ETFs (realization-taxed) | Realization | Equity income | âś” Equity income | Depends on structure |
| Mark-to-market funds / ETFs | Mark-to-market | Capital income | âś” Capital income | Annual assessment |
| Bonds | Mark-to-market | Capital income | âś” Capital income | Typical |
| Equity income → capital income | — | — | ✖ No | No cross-offsetting |
| Loss (mark-to-market) → gain (realization) | — | — | ✖ No | Different regimes |
Pension
Pension accounts are tax-simple, but completely isolated.
| Asset type | Tax regime | Can losses be offset? | Comment |
|---|---|---|---|
| All pension assets | Mark-to-market (PAL) | âś” Yes, internally | Net assessed |
| Loss in pension → gain outside | — | ✖ No | No connection |
| Rebalancing in pension | — | ✔ Straightforward | Tax-wise “cheap” |
When does it make sense to use losses actively?
It can be rational if both of these conditions are true:
- You would have reduced or exited the investment anyway for strategic reasons
- The losses and gains are tax-compatible (same kind)
Otherwise, you risk letting taxes drive the portfolio.
Conclusion: discipline first, taxes as an adjustment
Rebalancing works best when:
- the rules are defined in advance
- thresholds are realistic
- taxes are treated as friction — not as the driver
Rebalancing isn’t a ritual.
It’s risk management.
And in practice, it works best when discipline and the math come before tax considerations.