Rebalancing: Pruning Your Financial Garden

In the ancient parables of Babylon, wealth is often compared to a forest or a garden. To keep a garden healthy, you can't just plant seeds and walk away. You have to water it, protect it, and—crucially—you have to prune it.

In modern investing, we call this Rebalancing.

When I first started investing (Stage 4), I thought that if I picked a good mix of assets, I should just leave them alone forever. I thought "activity" was the enemy of "returns." But I soon learned that a garden left to itself eventually becomes overgrown and lopsided.

The Problem of "Winner's Bias"

Imagine you start with a simple, balanced garden: 50% Stocks (high growth, high risk) and 50% Bonds (low growth, low risk).

After a year, the stock market has a fantastic run and goes up by 20%, while bonds stay flat. Your "garden" is no longer 50/50. It’s now roughly 55% Stocks and 45% Bonds.

If you do nothing, and the stocks keep winning, you might end up with 70% or 80% of your wealth in stocks. On paper, this looks great—you’re making more money! But psychologically and practically, you have violated the 4th Cure: "Guard thy treasures from loss." You are now taking far more risk than you originally intended. If the stock market crashes, you will lose much more than your plan allowed for.

Rebalancing: The Only Way to "Sell High"

Rebalancing is the process of bringing your portfolio back to its original target. In our example, it means selling some of the "winning" stocks and using that money to buy more of the "losing" bonds.

This felt completely counter-intuitive to me at first. Why would I sell the thing that is winning to buy the thing that is flat?

Then I realized the "Wait, really?" truth: Rebalancing is a mechanical way to force yourself to "Sell High and Buy Low."

You are selling stocks when they are expensive (after a run-up).
You are buying bonds when they are relatively cheap.

It is the ultimate discipline. It removes the emotion from investing and replaces it with a system.

The "Do Nothing" Counter-Argument: Terry Smith

Before you reach for the pruning shears, it's worth consulting another "wise man." Terry Smith, the founder of Fundsmith, is famous for a three-step investment strategy that seems to contradict the very idea of rebalancing:

Buy good companies.
Don't overpay.
Do nothing.

Smith argues that if you have truly found a "great" company—one with a high return on capital and a wide moat—the best thing you can do is let it run. In his view, selling a winner just because it has become a larger part of your portfolio is like "cutting the flowers and watering the weeds."

So, who is right?

The answer lies in your Stage 4 goals. Terry Smith is a "Quality" investor. He is looking for exceptional businesses that can compound for decades. If you are a stock-picker following his lead, rebalancing might indeed truncate your best performers.

However, for most of us using global index funds, we aren't betting on a single "star" company. We are betting on the global economy. Rebalancing isn't about second-guessing the quality of a business; it's about Risk Management. It's the 4th Cure in action: ensuring that a single sector or asset class doesn't grow so large that it threatens your entire treasure.

The Psychology of the Pruning Shear

Pruning a rose bush feels wrong if you love roses. You are cutting off healthy growth! But any gardener will tell you that if you don't prune, the bush becomes leggy, the flowers get smaller, and eventually, the whole plant suffers.

Your portfolio is the same. Rebalancing "prunes" the overgrown sections to allow the rest of the garden to thrive. It ensures that no single "tree" becomes so large that its fall would destroy the entire forest.

How I Prune My Financial Garden

There are two main ways to rebalance, and I use a combination of both:

The Calendar Method: Once a year (I usually do it in April, around the start of the new tax year), I look at my total holdings. If anything is more than 5% away from its target, I move money around to fix it. This is my "Annual Prune."
The Inflow Method: This is my favorite because it’s frictionless. When I "pay myself first" (1st Cure) each month, I don't just buy everything in equal amounts. I use my new money to buy the assets that are currently underweight. If stocks are down that month, my new money goes mostly into stocks. I am "buying the dip" automatically without having to think about it.

Guarding the Treasures

The 4th Cure tells us to "consult with wise men." Most "wise men" in the world of finance—from Vanguard’s Jack Bogle to Warren Buffett—agree that asset allocation is the single most important factor in your long-term success. But asset allocation only works if you actually maintain it.

I built the Pension Calculator to help me set these targets. It lets me see how different mixes of assets (stocks vs. bonds vs. cash) might perform over decades. Once I have my "target forest," rebalancing is how I ensure I actually stay on that path.

Your Action Plan

Define Your Targets: What is your ideal mix? (e.g., 80% Global Stocks, 20% Bonds). Use the Pension Calculator to test your assumptions.
Check the Current State: Look at your accounts today. Has "lifestyle creep" or "market creep" moved you away from your plan?
Prune if Necessary: If you are more than 5% off-target, consider a rebalance. (Be mindful of transaction costs and taxes!)
Automate the Inflow: Try to use your monthly savings to buy the "laggards" and keep your garden in balance naturally.

Arkad said: "A part of all you earn is yours to keep."

Keep it safe by keeping it balanced.

Project Your Ideal GardenWhat should your asset mix look like? Use our tool to project different scenarios and find the balance that helps you sleep at night.Try the Pension Calculator

Ready to learn more about the 4th Cure? Explore our section on Protecting Your Progress.