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Portfolios and riskIntermediate

Portfolio rebalancing

Rebalancing returns the portfolio to its target risk. It is not intended to guess the next winner, but to prevent past movements from deciding the entire future exhibition.

3 min read Practical guide

By the end

You will choose a rule by calendar or bands that takes costs and taxes into account.

Why do weights change?

Winners grow within the portfolio and increase concentration; losers reduce exposure. Objectives, horizon and fundamentals also change. Not every detour requires operation.

Methods

Calendar reviews monthly, quarterly or annually. Bands act when a weight exceeds an absolute or relative threshold. Combining periodic review with bands prevents both forgetfulness and overoperation.

Example

Objective 10%, band ±2 points: you only act under 8% or above 12%, not before each movement.

Order of actions

First use new contributions and dividends; then consider sales. Prioritize really excessive risks. Includes spread, commission and tax: a perfect rebalancing before costs can worsen the net result.

Fundamentals vs. pesos

Don't automatically buy an asset whose thesis was broken just because it weighs less. Before validating that it still belongs to the portfolio. Document strategic changes separately from mechanical rebalancing.

Target weights.
Bands.
Calendar.
Costs/taxes.
Current thesis.

From data to a decision

Has weight or thesis changed?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

Rebalancing restores risk to the intended design using clear rules.

Adverse reading

Automatically selling winners cuts trends or creates costs without improving risk.

Required confirmation

Define bands, frequency, taxes, and economic reason before trading.

Reasoned example

A 10% target with an 8–12% band avoids trading small moves and acts when concentration truly changes.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

  1. 1Choose calendar, band or thesis-change rules and write them before use.
  2. 2Calculate current and target weights including cash, taxes and costs.
  3. 3Prioritise contributions and necessary sales to restore risk, not to reward the latest winner.
  4. 4Record reason and outcome to test whether the rule improves discipline without overtrading.

Review questions

  • Did price change, or did the thesis change?
  • Does current weight exceed your risk allowance?
  • Does rebalancing benefit exceed taxes and costs?

Worked case

Winner who dominates the portfolio

A 10% target position rises to 17%. With a band of ±3 points, it exceeds 13% and requires review. You can direct contributions to other positions before selling.

If the business has improved structurally, changing the objective is a different strategic decision and should be documented; Don't dress up rebalancing.

Decision rule

Use stable rules, costs and current thesis to avoid buying/selling out of emotion.

Put it into practice

Simulate a portfolio after an uneven year and compare it under annual rebalancing and banding.