You are currently viewing A cheat sheet to portfolio rebalancing

A cheat sheet to portfolio rebalancing

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'Perfectly balanced, just like everything should be’ are the words of a man with less than admirable plans, but they are very true, especially in the case of portfolios.

Selecting and establishing an asset allocation strategy is one thing, sticking to one and maintaining a portfolio that is in harmony with it is another. With time, your portfolio is bound to deviate from your initial plan. Portfolio rebalancing is just what you need in such a scenario.

What is Portfolio rebalancing?

Portfolio rebalancing refers to the process of buying and selling securities, to return to the predetermined asset allocation as per the investment strategy.

Rebalancing needs to be done periodically because, over time, the value of assets and their volatility change, and a lot of assets are bought and sold as well, this takes the portfolio away from the original allocation and could expose you to more risk than you desire. Also, your risk tolerance and investment goals can change with time, this can also be adjusted with rebalancing.

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How Rebalancing works?

Portfolio rebalancing is a strategy where investors adjust the mix of assets in their portfolio to maintain a desired allocation over time. For instance, if stocks perform well and their proportion increases beyond the desired level, investors may sell some stocks and buy other assets like bonds to restore balance.

This strategy helps manage risk by preventing the portfolio from becoming too heavily weighted in any single asset class. For example, let's say an investor's target allocation is 60% stocks and 40% bonds. If stocks outperform and their share grows to 70%, the investor might sell some stocks and reinvest the proceeds into bonds to realign the allocation to 60/40.

This proactive approach not only helps to mitigate risk but also allows investors to capitalize on market fluctuations, potentially enhancing returns over time.

portfolio rebalancing

Importance of portfolio rebalancing

Portfolio rebalancing is an essential element of risk management. It allows you to avoid being concentrated on highly risky assets and being overexposed to risks. Rebalancing allows you to diversify your portfolio to match it with your risk appetite.

With time, the asset mix of a portfolio changes. As you buy and sell assets, the asset allocation is bound to deviate from your original plan. Portfolio rebalancing gives you an idea of how far you are from your initial plan and lets you avoid any deviation from your initial plan.

Over time, not only do market conditions change but so do your risk tolerance and investment goals. You might need a new strategy that suits your needs better. Portfolio rebalancing allows you to smoothly make changes to your portfolio that align with a revised investment strategy.

You adjust the weights of different assets in your portfolio through rebalancing; this allows you to identify assets that have yielded good returns. Investors can identify and benefit from market trends by purchasing assets that fell in value and selling the ones that have risen.


  • Portfolio rebalancing is an objective and unemotional approach to investment. It inculcates discipline in the decision making process and reduces exposure to risks.
  • Portfolios are always dynamic and keep changing with time. If left unchecked, it can deviate from the investing strategy of the investor. Rebalancing brings it back in line with the original plan.
  • Rebalancing allows for flexibility. It helps investors smoothly align their portfolio with a new investment strategy.
  • Rebalancing can be carried out by portfolio managers or small investors.
  • Portfolio rebalancing keeps the asset mix aligned with the investor’s risk tolerance and expected return.


  • Rebalancing prompts the investor to sell the assets that have already increased in value, in order to control risk. This could cost the investor potential gains from an upward price trend.
  • Portfolio rebalancing involves a high increase in the number of transactions, this costs a lot in terms of transaction costs and could reduce net income.
  • Rebalancing requires the investor to judge risk exposure and trends. This can not be done properly without sufficient market knowledge, which makes it very challenging for beginner traders to do it themselves.
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Methods of Rebalancing-

Calendar Rebalancing

The most basic method of rebalancing is calendar rebalancing. With this approach, investors simply review their investment portfolio at set intervals and adjust it to match the original allocation according to a chosen frequency.

These could be as frequent as the investor wants. Monthly or quarterly assessments are commonly favored, as weekly rebalancing would be too costly, while yearly rebalancing might lead to excessive portfolio drift between adjustments.

Determining the optimal rebalancing frequency depends on factors such as time constraints, transaction fees, and acceptable levels of drift. Calendar rebalancing offers a notable advantage over formulaic rebalancing in that it requires less time for investors, as the latter involves a continuous process.

Constant Proportion Portfolio Insurance

Constant proportion portfolio insurance is one of the most intensive portfolio rebalancing strategies out there. It requires the investor to set a base value or floor value to the per buck value of their portfolio.

CPPI assumes that the risk tolerance of an investor increases with their wealth. Thus, the investor is only required to hold a minimum reserve in risk-free securities and the rest is invested as per the needs and risk appetite of the investor. If there is a rise in the value of the portfolio, more funds are allocated to highly risky assets, whereas if the value of the portfolio falls, they take a smaller position towards risky assets.

CPPI is often referred to as a convex strategy as its returns are similar to those of a synthetic call option.

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Striking a balance

Portfolio rebalancing is a critical tool for effective investment management, offering both advantages and disadvantages that investors must carefully consider. It helps investors mitigate risks, maintain discipline, and adapt to changing market conditions.

While portfolio rebalancing offers numerous benefits, it also presents challenges, particularly in terms of cost and complexity. The need to sell assets that have appreciated in value may result in missed opportunities for further gains, while the increased frequency of transactions can incur higher transaction costs and tax implications.

In essence, portfolio rebalancing is a fundamental aspect of prudent investment management, enabling investors to navigate market fluctuations, manage risk, and pursue their long-term financial goals with confidence and resilience.

When to Rebalance Portfolio?

The frequency or time of portfolio rebalancing is  decided on the basis of triggers. The three most common triggers used by investors are:

  • Threshold: You shall rebalance your portfolio when it has deviated from the decided asset allocation by a certain percentage.
  • Time: You rebalance the portfolio at decided intervals of time, e.g. 6 months, a year, etc.
  • Threshold and Time: This is a combination trigger, that combines time and the threshold trigger.


Rebalancing a portfolio helps mitigate risks, uphold discipline, and adapt to market dynamics. It maintains alignment with investment strategies and risk tolerance. However, rebalancing poses challenges like high transaction costs and tax implications. Investors can strike a balance between risk management and opportunity optimization by judiciously weighing these factors and employing appropriate rebalancing methods.

Portfolio rebalancing empowers investors to navigate market uncertainties with confidence, ensuring their portfolios remain resilient and aligned with long-term financial objectives.

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