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What Is Portfolio Rebalancing? An Educational Overview

  • Parkview Partners Capital Management
  • 14 hours ago
  • 3 min read

Understanding Portfolio Rebalancing


Portfolio rebalancing is the process of periodically adjusting investment holdings to maintain a desired asset allocation. Over time, market movements can cause certain assets to see growth potential than others, leading a portfolio to drift away from its original risk profile. Rebalancing is intended to realign the portfolio with long-term objectives rather than respond to short-term market fluctuations.


This discipline is often viewed as a form of ongoing portfolio maintenance. Rather than focusing on maximizing returns, rebalancing emphasizes managing risk and maintaining consistency within an investment strategy.


Why Portfolio Drift Occurs


Portfolio drift happens naturally as different asset classes perform differently over time. For example, if equities outperform fixed income during a strong market period, a portfolio initially designed with balanced exposure may become more heavily weighted toward equities. While this shift may increase growth potential, it can also increase risk beyond what was originally intended.


Without periodic review and adjustment, portfolio drift can quietly alter the overall risk profile, potentially leading to outcomes that no longer align with an investor’s comfort level or financial goals.


The Primary Purpose of Rebalancing


The core purpose of portfolio rebalancing is risk management. By restoring allocations to predetermined targets, rebalancing helps maintain alignment with long-term planning assumptions.


Key objectives include:


  • Preserving the intended risk profile

  • Supporting diversification across asset classes

  • Reducing unintended concentration

  • Reinforcing discipline during market volatility


Rebalancing is not designed to predict market movements or enhance short-term performance.


Common Rebalancing Approaches


Calendar-Based Rebalancing


This method involves reviewing and adjusting the portfolio on a set schedule, such as annually or semi-annually. The simplicity of this approach can help ensure consistency without frequent monitoring.


Considerations:


  • Easy to implement

  • May rebalance even when allocations are only slightly off

  • Less responsive to sudden market shifts


Threshold-Based Rebalancing


Threshold-based strategies trigger rebalancing when an asset class deviates from its target allocation by a predetermined percentage, such as 5%.


Considerations:


  • More responsive to market movements

  • Helps control portfolio drift more precisely

  • Requires more frequent monitoring


Cash-Flow Rebalancing


This approach uses new contributions or withdrawals to help realign allocations. New capital may be directed toward underweighted assets, while withdrawals may come from overweighted positions.


Considerations:


  • May reduce transaction costs

  • Can help manage tax implications

  • Works best when consistent cash flows exist


Behavioral Benefits of Rebalancing


Rebalancing may also support emotional discipline. Market volatility can trigger reactions such as chasing recent performance or selling during downturns. A structured rebalancing process helps reduce the influence of these behavioral biases by establishing predefined rules for portfolio adjustments.


This discipline encourages consistency and reinforces a long-term perspective.


Tax and Cost Awareness


Rebalancing involves transactions, which may have tax and cost implications—particularly in taxable accounts. Selling appreciated assets may trigger capital gains taxes, and frequent trading can increase transaction costs.


Tax-aware rebalancing often considers:


  • Using tax-advantaged accounts for adjustments

  • Coordinating rebalancing with cash flows

  • Reviewing tax impact before executing trades


These considerations are typically addressed as part of a broader planning process.


When Rebalancing May Be Reviewed


In addition to scheduled reviews, rebalancing may be revisited following significant changes such as:


  • Major market shifts

  • Life events (retirement, inheritance, business sale)

  • Changes in goals or risk tolerance


Regular reviews help ensure the portfolio continues to reflect current circumstances.


Conclusion


Portfolio rebalancing is a foundational discipline focused on maintaining alignment between an investment strategy and long-term objectives. By managing portfolio drift, reinforcing diversification, and supporting emotional discipline, rebalancing serves as an important component of structured wealth management.


The appropriate approach depends on individual goals, account types, and broader financial considerations.



Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd and Parkview Partners Capital Management are separate entities. Neither Stratos nor Parkview Partners Capital Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. Investing involves risk, including possible loss of principal. The information presented is for educational purposes only and should not be interpreted as individualized investment, tax, or legal advice. Past performance is not indicative of future results. For more information, please review our Form ADV, available upon request.


 
 
 

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Financial Advisor, Investment Advisor, High Net Worth, Wealth Management, Tax Planning, Risk Management, Financial Coordination, Retirement Planning, Charitable Giving, Columbus Ohio, Parkview Partners Capital Management

291 East Livingston Ave.
Columbus, OH 43215


Phone: (614) 427-2132

Fax: (614) 427-2132

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