Portfolio Rebalancing

Portfolio rebalancing is the systematic act of buying and selling assets to return a portfolio to its original, target asset allocation weights.

As different assets generate different returns over time, their weights in the portfolio drift. For example, during a strong stock bull market, a classic 60/40 portfolio might drift to 75/25, increasing the portfolio's risk profile. Rebalancing systematically forces you to sell overperforming assets (selling high) and buy lagging assets (buying low).

There are two primary methods of rebalancing: Time-based rebalancing (e.g., rebalancing exactly once a year or every quarter) and Band-based rebalancing (e.g., rebalancing only when an asset drifts by more than 5% or 10% from its target weight, a method popular in the Permanent Portfolio).

Rebalancing maintains the desired risk profile of your portfolio and prevents style drift. While it does not always guarantee higher returns compared to buy-and-hold (especially in strong, single-asset bull markets), it is essential for controlling volatility and drawdown risk.