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.
