Investor Corner/Building and judging a portfolio/Portfolio Construction & Behaviour
3.1.8 Rebalancing
Rebalancing brings a portfolio back to its target allocation by trimming assets that have grown beyond their target weight and adding to those that have fallen below it. It controls risk and enforces a disciplined process.
Why allocations drift on their own
If equity grows faster than debt over a year, an initial 60-40 equity-debt split can quietly drift to 70-30 without a single deliberate decision being made. This drift shifts the portfolio's actual risk level away from what was originally intended, purely as a side effect of different assets growing at different rates.
What rebalancing actually does
Rebalancing means periodically selling a portion of whichever asset has grown to exceed its target weight, and using the proceeds to buy more of whichever asset has fallen below its target weight, restoring the intended mix. This mechanically enforces a version of selling relatively high and buying relatively low, without requiring any market prediction at all.
How often to actually do it
Rebalancing too frequently can generate unnecessary transaction costs and, outside tax-advantaged structures, unnecessary tax events. Common approaches rebalance either on a fixed schedule, such as annually, or whenever an allocation drifts beyond a set threshold, such as five percentage points from target, whichever comes first.
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