First, the key terms.

Target weight
The intended share of portfolio value allocated to an exposure.
Drift
The difference between actual and intended weights.

The idea, explained

An allocation can drift even when no trades are made. Rebalancing is a risk-management process, not a guarantee of extra return. Calendar rules and tolerance bands provide different ways to decide when to act. Contributions or withdrawals can sometimes adjust weights without selling, while taxes, trading costs and constraints affect implementation. The target itself should reflect the objective; mechanically restoring an outdated target is not automatically sensible.

STEP 1

Recalculate using current value

Weights are percentages of the current portfolio total, not the original deposit. Different asset returns change that denominator. Start with current values before deciding whether a target band was crossed.

STEP 2

Consider implementation costs

New contributions, withdrawals or trades can change weights. Costs, taxes and account rules influence implementation. Rebalancing restores a chosen risk structure; it does not validate that the target remains appropriate.

Follow a worked example.

A hypothetical $10,000 portfolio starts with $6,000 in stocks and $4,000 in bonds. Stocks rise to $7,200 while bonds stay at $4,000. The stock weight becomes about 64.3 percent, above the original 60 percent.

Walk it through, one step at a time

  1. A fictional portfolio starts with $600 stocks and $400 bonds. Stocks rise to $900 while bonds remain $400.
  2. The total is $1,300 and stocks weigh $900 ÷ $1,300, approximately 69.23 percent.
  3. A 60 percent stock target corresponds to $780, implying a $120 reduction in stock exposure if rebalanced solely through trades, ignoring costs and taxes.

Where people get stuck

Frequent trading can add costs without meaningfully improving the intended risk profile.

Now try it yourself.

Pause before opening each answer. Explain your reasoning in your own words.

1. Check the core idea

Does doing nothing preserve the portfolio’s original percentage allocation?

Reveal the answer & reasoning

No. Different asset returns change relative weights. Unchanged holdings are not the same as unchanged allocation.

2. Apply what you learned

Does rebalancing prove that the asset being sold will perform worse next?

Reveal the answer & reasoning

No. It is a rule about exposure relative to a target, not necessarily a forecast of subsequent returns.