Portfolio Rebalancing Rules: Set Review Dates and Allocation Thresholds
Rebalancing restores target asset weights. Learn how review schedules differ from allocation bands, how to use new contributions, and when a change in investment thesis calls for a separate decision.
Rebalancing brings asset weights altered by price changes back toward predetermined targets. You can review allocations on a schedule or trade based on how far weights have moved from their targets. Rather than automatically selling assets that have gained, first confirm that the targets remain valid, then adjust for costs and contributions.
Separate the review schedule from trading conditions
A scheduled review determines when to check the account, while a deviation threshold determines when to trade. Checking does not require placing an order every time. Also distinguish an absolute threshold, measured in percentage points away from the target weight, from a relative threshold, measured as a percentage change from the target. For a small asset class, the same percentage-point deviation represents a much larger relative change, so record the units clearly.
Calculate whether new money can rebalance the portfolio before selling
Allocating new contributions or dividends to underweight assets can restore weights while reducing sales. But contributions that are small relative to the account may struggle to correct large deviations. Because target amounts change when the account total changes, do not assume that depositing the existing shortfall will restore the allocation. Account for taxes, trading fees, currency conversion costs, and minimum order sizes when deciding whether the benefit of matching the target exactly exceeds the cost.
Distinguish mechanical rebalancing from revising a thesis
An unchanged asset allocation target is different from an incorrect assessment of a particular company's value. Continuing to buy a stock whose business has deteriorated simply because its price has fallen is not the same as restoring an asset-class weight. Conversely, repeatedly changing long-term targets just because performance was poor can turn rebalancing rules into market chasing. Record target changes separately and connect them to changes in income, expenses, investment horizon, or structural risk.
When you make an exception, record why you did not follow the trading conditions you set. Evidence of excessive transaction costs or a change in an asset's structure can help at the next review. But if you keep making exceptions merely because you feel prices will rise further, target weights stop acting as real constraints. For management purposes, keeping a record of the frequency and reasons for exceptions matters more than eliminating every exception.
Worked example
Hypothetical example: A KRW 10 million account targets 60% stocks and 40% cash but currently holds KRW 7 million in stocks and KRW 3 million in cash. Moving KRW 1 million from stocks to cash restores the target. If you add only cash without selling, 700÷(1,000+x)=0.6, with amounts in units of KRW 10,000, so you need to deposit approximately KRW 1.6667 million. Depositing just KRW 1 million leaves the stock weight at 63.64%, still above target. This calculation excludes costs and interest.
What to check
- Is the allocation deviation clearly measured in percent or percentage points?
- Have you accounted for the new total asset value after contributions?
- Have you separately checked selling costs and tax conditions?
- Have you recorded target changes separately from restoring weights?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.