Rebalancing

Rebalancing is the process of returning a portfolio to its target allocation after market movement has pulled it away — selling what has grown as a share of the portfolio and buying what has shrunk.

Why drift happens

Nothing has to go wrong. Assets grow at different rates, so a portfolio set at a target allocation stops being at that allocation immediately and continues moving.

Left alone long enough, a portfolio ends up concentrated in whatever has risen most, which is the opposite of the risk profile it was built to have.

Calendar or threshold

Calendar rebalancing happens on a schedule. Threshold rebalancing happens when a holding moves more than a set distance from its target. Threshold responds to what actually happened; calendar is simpler to operate and easier to document.

Many firms use both — a scheduled review with threshold triggers between them.

The tax constraint

In a taxable account, rebalancing realizes gains. That is a real cost against an uncertain benefit, and it is why the same rule should not be applied identically to a taxable account and a retirement account.

Directing new contributions toward the underweight holding rebalances without selling anything, which is why cash flow is the cheapest rebalancing tool available.

What it is not

Rebalancing is risk maintenance, not a return strategy. Whether it adds or subtracts return over a given period depends on what happened, and claiming it reliably improves outcomes is a claim nobody should make.