Rebalancing

Rebalancing is the process of realigning the weights of assets in a portfolio to maintain a desired allocation or risk profile. It is a common practice in investment management and can also refer to procedures in other contexts where assets or resources must be redistributed to restore balance.

In a typical investment setting, markets cause asset values to move at different rates, causing the initial target mix to drift. Rebalancing restores the original allocation, which can help control risk and maintain diversification. A standard target might be 60% equities and 40% fixed income, or other allocations chosen to fit an investor's goals and tolerance.

Rebalancing approaches include time-based methods, such as calendar-based rebalancing performed at regular intervals (e.g., quarterly or annually), and threshold-based methods, which trigger trades when asset weights deviate from targets by a set amount (for example, five percentage points). Some portfolios use a combination or employ more dynamic strategies.

Costs and consequences include transaction costs, tax implications in taxable accounts, and potential tax consequences from realize gains. In tax-advantaged accounts, taxes are not an immediate concern, but other frictions may apply. Partial rebalancing or rebalancing using new contributions can mitigate costs.

Rebalancing is a governance decision tied to an investment policy statement. It seeks to maintain risk/return objectives and disciplined behavior, though it may reduce or increase expected returns depending on market conditions and costs. It is not a guarantee of positive performance and should be aligned with overall investment strategy.