Allocation
Allocation is how your money is divided — across asset classes, regions, sectors and individual holdings. It is the structural decision that drives most of the variation in outcomes, and it drifts with no one deciding anything.
Drift happens because winners grow. A holding that rises while everything else stays flat takes a larger share of the total, so a portfolio that began deliberately balanced concentrates into whatever has done best lately. That is the opposite of what most people intend.
Allocation measured by fund name misleads. Several funds tracking similar large indices are substantially one position in different wrappers. What matters is the underlying exposure: which companies, which sectors, which currencies.
Count everything you actually depend on
A portfolio is not the whole picture. Employer shares, an employer pension and a salary from the same company are three exposures to one firm. Property, future earnings and a concentrated holding in the sector you work in can all move together in a downturn.
Cost basis and unrealized gains
Cost basis is what you paid, fees included. It sets the gain or loss on a disposal, and in most jurisdictions it sets the tax. It sounds trivial until you have bought the same holding repeatedly at different prices.
| Term | What it means |
|---|---|
| Cost basis | The purchase price plus acquisition costs. Across multiple purchases, jurisdictions differ on the method — average cost, first-in-first-out, or specific identification — and the method changes the taxable gain. |
| Unrealized gain | The paper difference between current value and cost basis. Not money. It moves daily and can disappear before you sell. |
| Realized gain | The difference locked in by a completed disposal. This is the figure that is generally taxable, and the one that is actually yours. |
| Total return | Price movement plus income received — the only complete measure. A screen showing price change alone understates an income-paying holding. |
Cost basis is easy to lose. Broker transfers, corporate actions, splits and reinvested dividends all complicate it, and platforms do not reliably carry it across. Reconstructing a basis years after a transfer is slow, expensive work that a folder of confirmations prevents.
Measuring performance
Most portfolio screens show a single percentage. Which of several possible calculations produced it is rarely stated, and the differences are not small.
- Compare against the right benchmark
Judge a portfolio of large technology shares against a comparable index, not against whichever index flatters it. A benchmark chosen after the result is known measures nothing.
- Account for money going in and out
A portfolio you have been adding to shows a rising value even if every holding fell. Growth in value is not a return on what was invested.
- Measure after fees and tax
A gross return is not what you keep. Platform charges, fund charges, spreads, conversion costs and tax all come out of it.
- Use a sensible period
A single year is noise for an equity portfolio. Judging a long-horizon strategy on a few months measures luck, in either direction.
Rebalancing
Rebalancing means selling some of what has grown and buying more of what has not, to restore the allocation you chose. It is mechanically simple and psychologically unpleasant: you trim the best performer to buy the worst.
- It controls risk rather than raising returns. Its job is stopping one holding from quietly becoming the whole portfolio.
- It has costs. Spreads, commissions and possibly a taxable disposal. Rebalancing too often costs more than the drift it corrects.
- Thresholds suit most people better than calendars. Acting when an allocation drifts beyond a set band responds to the portfolio; a fixed date responds to the calendar.
- New contributions can do the work. Directing fresh money to the underweight holding rebalances without a sale and without triggering tax.
How often to look
Checking a portfolio often feels responsible and mostly is not. Short-term movement is largely noise, and watching it closely produces activity rather than returns. Much of the gap between fund returns and investor returns comes from buying after rises and selling after falls.
A periodic review with a set agenda beats frequent glancing. "Is it up today?" has no useful answer. The questions below do.
An agenda for a periodic review
Four questions, asked on a schedule you fix in advance rather than when a headline prompts you, cover most of what a review is for.
- Has the allocation drifted beyond its band? Measured on the underlying exposure rather than the fund names, as above.
- Have the costs changed? Platform charges and fund ongoing charges are both revised from time to time, and the notice arrives as a document rather than an alert.
- Are the cost basis records complete? Check after a transfer between brokers or a corporate action, which is when they break.
- Has your own timeframe changed? A date that has moved closer changes which risks matter, whatever the holdings have done.
Frequently asked questions
Is an unrealized gain mine?
Not yet. It is a paper figure that moves daily and can disappear before you act. Only a realized disposal turns it into money, and that is usually the point at which tax applies.
How often should I rebalance?
There is no single right answer. Many people use drift thresholds rather than fixed dates, and direct new contributions to the underweight holding so rebalancing needs no sale.
My portfolio is up. Does that mean I am doing well?
Not necessarily. If you have been adding money, the value rises regardless of performance, and a rise smaller than a comparable index is underperformance. Compare against a benchmark you chose in advance, after fees.
Which cost basis method should I use?
Where your jurisdiction allows a choice — average cost, first-in-first-out, or specific identification — the method changes the taxable gain on a partial sale, sometimes substantially. The choice is often fixed once made for a holding, so establish the local rules before the first disposal.
Does a falling allocation percentage mean I lost money?
Not necessarily. A holding's share of the total falls when other holdings grow faster, even if that holding also rose. Read the position value alongside the percentage before concluding anything from the pie chart.
