Why portfolio weights drift
Suppose you start with a "60% stocks / 40% bonds" target. After some time:
- If stocks rally and bonds dip slightly, you might end up at "70% stocks / 30% bonds"
- If stocks fall and bonds rise, you might end up at "50% stocks / 50% bonds"
In other words, the actual ratio drifts away from the target as markets move. This drift means the portfolio's overall risk profile has changed too — what you originally wanted as a 60/40 has effectively become a different risk-level portfolio.
What rebalancing means
"Rebalancing" means bringing the drifted weights back to the original target. Two common approaches:
- Sell the overweight category and buy the underweight one
- Adjust via new contributions: direct new money preferentially into the currently underweight category so the overall mix gradually returns to target
The second approach involves no selling, so transaction costs and taxes tend to be lower.
Two common trigger rules
Two commonly discussed rebalancing triggers in public literature:
Calendar-based
Review at fixed intervals — quarterly, semi-annually, or annually. When the time comes, review the portfolio and adjust.
- Pros: simple rule, easy to execute, removes emotional input
- Cons: if markets happen to move sharply right at the trigger date, adjustments may be mistimed or excessive
Threshold-based
Set a drift tolerance — e.g. "trigger only when a category deviates from target by more than 5 percentage points".
- Pros: adjusts only when necessary, usually fewer trades
- Cons: requires more frequent monitoring or automated alerts
Hybrid approaches also exist — e.g. "review every six months, but only trade if deviation exceeds the threshold" — combining features of both.
Costs to consider when rebalancing
Commonly cited cost dimensions of rebalancing:
- Brokerage fees: the broker's commission on buy/sell orders
- Securities transaction tax: an added cost for Taiwan stock trades
- Bid-ask spread: the gap between buy and sell prices at execution
- Tax impact: realized capital gains or distributions may carry tax costs
So rebalancing is not better simply by being more frequent. Over-trading lets costs eat into any benefit from the adjustment.
Why rebalancing gets so much discussion
The core idea behind rebalancing is discipline — keeping the portfolio at your originally chosen risk level over the long run, rather than letting market emotion drive structure. Whether and how to do it still depends on individual judgment. This article covers the concept only.