Rebalancing is the process of realigning portfolio weights back to a chosen target.
It is not about predicting markets.
It is about controlling allocation drift, risk exposure, and concentration over time.
What rebalancing represents
Rebalancing answers a structural question:
How much of my portfolio should each asset represent?
As prices move, allocations drift.
Rebalancing restores intended proportions.
It is a maintenance process, not a timing strategy.
Why allocation drift happens
Allocation drift occurs when:
- some assets outperform others
- volatility affects positions unevenly
- capital flows change relative weights
Over time, winners dominate portfolios and losers shrink — regardless of original intent.
Rebalancing vs buy and hold
Buy and hold accepts drift.
Rebalancing resists it.
- Buy and hold increases concentration in winners
- Rebalancing trims winners and adds to laggards
Neither is inherently superior — they reflect different philosophies.
Rebalancing and risk control
Rebalancing primarily controls risk, not return.
It helps:
- prevent unintended concentration
- maintain diversification
- stabilize drawdowns
- enforce discipline
Returns are a secondary effect.
Rebalancing and relative performance
Rebalancing creates systematic relative trades.
It:
- sells assets that have outperformed
- buys assets that have underperformed
This embeds a mean-reversion assumption, whether intended or not.
Rebalancing in volatile markets
In volatile environments:
- drift accelerates
- rebalancing frequency matters
- transaction effects increase
Frequent rebalancing:
- reduces concentration faster
- increases turnover
- may reduce upside in strong trends
Infrequent rebalancing:
- allows drift
- increases path dependency
Common rebalancing methods
Time-based rebalancing
- Rebalance on a fixed schedule (monthly, quarterly)
- Simple and predictable
- Ignores magnitude of drift
Threshold-based rebalancing
- Rebalance when allocations deviate beyond a threshold
- More responsive to volatility
- Less frequent in calm markets
Hybrid approaches
- Combine time and threshold rules
- Balance responsiveness and simplicity
Rebalancing vs market timing
Rebalancing is not market timing.
It does not:
- predict trends
- optimize entries
- avoid drawdowns
It enforces structural discipline, not directional bets.
Common misconceptions
“Rebalancing improves returns”
Not guaranteed.
It improves risk consistency, not necessarily performance.
“Rebalancing prevents losses”
False.
It reshapes losses — it doesn’t eliminate them.
“More frequent rebalancing is better”
Not always.
Higher frequency increases turnover and opportunity cost.
When rebalancing is most useful
Rebalancing is most useful when:
- managing multi-asset portfolios
- controlling concentration risk
- enforcing long-term allocation plans
- operating in volatile environments
When rebalancing is less useful
Rebalancing is less effective when:
- one asset structurally dominates
- transaction costs are high
- strong trends persist for long periods
- allocations are intentionally opportunistic
Key takeaway
Rebalancing is a tool for structure, not foresight.
- It controls drift
- It enforces discipline
- It trades upside for stability
- It reflects risk philosophy, not prediction
Used correctly, rebalancing keeps portfolios aligned with intent — even when markets move faster than plans.
