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.
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 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.
In a taxable account, rebalancing realises 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.
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.
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