4-4 The Basics of Rebalancing and Review
A page on how to tidy up when an allocation drifts, and the order to review things in
So far we have covered what to hold, how to read diversification across equities and funds, and how to think about weights. But however carefully you design it, an allocation drifts naturally over time. Rebalancing is not about returning to the original weights precisely every time — it is the work of tidying up against a target allocation and tolerance band you set in advance.
- The point of rebalancing is not to be right about the future but to tidy the allocation against your target and tolerance band.
- When reviewing, look at allocation, overlap, cost, and changes in your circumstances — not just products.
- To avoid acting on emotion, decide your target allocation, tolerance band, and review frequency up front.
- When the allocation drifts, separate
returning to the original designfromchanging the target allocation itself.
1. An allocation always drifts, even when built correctly
Start from the same allocation and, as some assets rise while others fall, the weights change naturally. In a phase where equities keep rising, for instance, the equity weight can creep up without your noticing, leaving you in a riskier state than when you started.
2. When it drifts, separate returning to the design from changing it
When the market moves, portfolio weights drift naturally. The distinction to draw at that point is whether this drift only needs returning to the original design or whether my circumstances or purpose changed, so the target allocation itself should change.
| Trigger | How to think about it |
|---|---|
| A periodic check every six or twelve months | Easy to review without acting on emotion |
| Drifting well outside the tolerance band | Easy to correct the gap against the target allocation |
| A life event | If purpose or horizon changed, revisit the allocation too |
First, if your purpose, horizon, and when you need the money have not changed, the default is return to the original design. If the equity weight has simply risen or fallen temporarily because of the market, tidying up against your target allocation and tolerance band is enough.
If instead something changed — a life event brought the date you need the money closer, your income or household headroom shifted, or you have become less able to absorb large moves than before — returning to the original is not enough. In that case, you need to revisit the target allocation itself.