Rebalancing
Candlefocus EditorTwo approaches to rebalancing exist: calendar rebalancing and constant mix rebalancing. Calendar rebalancing is defined as "the periodic and systematic resetting of a portfolio's weights to predetermined targets at regular intervals," such as once a year or every quarter. This strategy is helpful for investors looking for stability, as it does not require them to keep a constant and active watch on their portfolio’s asset allocation. However, calendar rebalancing may be too slow at responding to market fluctuations and require investors to continually pay transaction fees each time they adjust their asset allocations.
Constant mix rebalancing is a more active form of rebalancing and is usually conducted by computer algorithms. Instead of predetermined intervals like with calendar rebalancing, various criteria are used to determine when an adjustment should be made. This is advantageous as it is more responsive to changing market conditions and can incorporate upper and/or lower thresholds, to prevent frequent rebalancing that could incur excessive transaction costs. Despite these benefits, there will always be a tradeoff between cost and risk, as frequent rebalancing could result in investors missing out on potential rewards due to selling assets as their values are increasing.
Overall, rebalancing is an essential part of any successful investing strategy and can protect investors from making hasty decisions and unplanned exposure to higher risk due to unforeseen market fluctuations. In order to strike the right balance between cost, risk, and rewards, investors should understand the differences between calendar rebalancing and constant mix rebalancing and assess which strategy best suits their individual investment goals.