The Psychology Of Rebalancing: Why It May Be Hard to Sell Winners and Buy Underperformers

Rebalancing sounds straightforward on paper: trim what has gained, add to what has lagged, and bring the portfolio back to plan. In reality, it often feels uncomfortable. Selling part of a performing asset or adding to one that has shown slower growth may appear counterintuitive. Many investors hesitate or delay for exactly these reasons.

Table of contents

• Why rebalancing feels challenging
• Where behavioural finance fits in
• The biases that may get in the way
• Why rebalancing still matters
• Practical ways that may make rebalancing easier
• A balanced view
• The takeaway

Why rebalancing feels challenging

Rebalancing is the process of adjusting a portfolio back to its intended asset mix—the proportion of equities, debt, and other asset classes that were initially chosen according to an investor’s goals and tolerance for risk. Over time, market movements may shift this balance. For example, if equities rise sharply, their share in the portfolio increases while the weight of debt falls. This may result in the need to rebalance.

This is where discomfort may arise. Selling an asset with the potential for higher returns can feel premature, while allocating more to an asset that has delivered lower returns may feel risky. In addition, our minds often project the recent past into the future, leading us to assume that these performance trends will continue —even though markets can and do change. Rebalancing may require us to act against those instincts.

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Where behavioural finance fits in

Behavioural finance studies how psychological and social influences shape financial decisions, sometimes leading investors away from rational models. Rebalancing sits in this domain. It requires investors to act in ways that run counter to natural emotional responses—reducing exposure where investor confidence feels high and adding where doubt feels stronger.

The biases that may get in the way

• Disposition effect: Investors tend to sell assets that have outperformed too quickly to attempt to lock in gains and hold onto underperformers too long to avoid the pain of realising a loss. Rebalancing pushes against this bias: it may require trimming appreciating assets only when they grow beyond their intended weight – not to book profits – and adding to lagging allocations, even when emotion suggests doing the opposite.
• Loss aversion: Losses usually feel more intense than gains of the same size. This may discourage adding to a recent underperformer or encourage holding onto a rallying asset for fear of giving back gains.
• Status quo bias: Doing nothing feels easier. Rebalancing requires an active decision that may invite second-guessing.
• Recency and availability: Fresh price moves and headlines dominate attention. Trimming an asset after months of performance may feel wrong, even if it has grown beyond its intended weight.
• Anchoring and mental accounting: Investors may fixate on purchase prices or view “profits” differently from “principal,” influencing how they size positions.
• Regret aversion: There is the fear of trimming just before another rally or adding before another decline. This anticipation of regret often leads to inaction.

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Why rebalancing still matters

A portfolio that drifts too far from its allocation may change its risk profile without the investor realising it. If equities surge, the portfolio may carry more downside exposure than intended. If debt rallies, the portfolio might hold more low-yielding assets than planned. Rebalancing may help keep allocations closer to their intended role.

It does not remove risk or guarantee stronger returns. At times, it may lag during powerful market trends. But as a discipline, it may support consistency and keep decisions anchored in long-term objectives rather than short-term impulses.

Practical ways that may make rebalancing easier

• Pre-commit to a method: Choose a simple approach—such as calendar-based (e.g., semi-annual) or threshold-based (e.g., when an allocation drifts ±5% from target). Writing it down reduces hesitation.
• Use ranges, not points: Target bands (e.g., 55–65% equity instead of exactly 60%) may limit unnecessary trades and reduce costs.
• Automate where possible: Contribution plans or investment products that offer automatic rebalancing may help reduce the role of emotions in the process.
• Rebalance with new money: Directing fresh contributions into underweight allocations may feel easier than trimming strong performers.
• Apply a checklist: Ask whether fundamentals have changed, not just prices. Consider: Would I make the same move if recent performance were reversed?
• Account for taxes and costs: Factoring in transaction costs, exit loads, and tax implications may help improve outcomes and reduce second thoughts.
• Keep perspective visible: Dashboards or simple trackers showing current versus target allocations may make the case for action clearer than market headlines.

A balanced view

Rebalancing is best seen as a process for risk management, not as a prediction tool. There will be times when an asset continues to rise after being trimmed or continues to decline after being topped up. That is part of market behaviour. The aim is to follow a disciplined strategy rather than react to every swing.

Read Also: Investor Psychology During Market Crashes: A Look Back

The takeaway

Rebalancing often asks investors to do what feels least comfortable: reduce exposure where confidence is high and add where uncertainty is stronger. Behavioural finance helps explain why this is difficult, and it also offers tools to manage those instincts. By committing to a method, using ranges, and keeping focus on long-term objectives, investors may bring their portfolios closer to plan and further from impulse.

Past performance may or may not be sustained in future.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.

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