11 Rebalancing: Tracking a Target Portfolio

This chapter covers

The need for rebalancing in portfolios with defined target weights, and the pitfalls of not rebalancing
Simple rebalancing rules based on fixed time schedules or deviation thresholds
Optimization-based rebalancing procedures incorporating transaction costs and taxes

Over time, a portfolio may naturally drift away from its target weights due to differing changes in asset prices. Rebalancing refers to the process of periodically correcting the drift to bring the portfolio closer to its target weights. In this chapter, we’ll show why rebalancing is important, and cover various methods for rebalancing, starting with the most simple and ending with the most sophisticated.

11.1 Rebalancing basics

11.1.1 The need for rebalancing

11.1.2 Downsides of rebalancing

11.1.3 Dividends and deposits

11.2 Simple rebalancing strategies

11.2.1 Fixed-interval rebalancing

11.2.2 Threshold-based rebalancing

11.2.3 Final thoughts

11.3 Optimizing rebalancing

11.3.1 Variables

11.3.2 Inputs

11.3.3 Formulating the problem

11.3.4 Running an example

11.4 Comparing rebalancing approaches

11.4.1 Implementing rebalancers

11.4.2 Building the backtester

11.4.3 Running backtests

11.4.4 Evaluating results

11.4.5 Summarizing backtests

11.5 Summary