Portfolio Construction and Maintenance · ETFs

Rebalancing restores a chosen risk allocation after markets and cash flows change it. A written rule can make the process more disciplined and less reactive.

Define the purpose of the trade

Rebalancing is intended to bring the portfolio back toward its target risk mix. It is not a forecast that the recent winner must fall tomorrow. Selling appreciated assets and buying laggards can feel uncomfortable, which is why the rule should exist before the decision. A portfolio target also deserves review when financial goals change.

Choose a workable trigger

A calendar rule checks weights at set intervals. A threshold rule acts when an allocation moves outside a specified range. Combining periodic checks with tolerance bands can reduce unnecessary trading. No interval or threshold is universally best. Consider taxes, trading costs, account restrictions and how much drift materially changes the risk you intended to take.

Use new cash before selling where appropriate

Suppose a portfolio has $7,000 in equities and $3,000 in bonds, with a 60% and 40% target. Adding $1,000 entirely to bonds produces $7,000 and $4,000, approximately 63.6% and 36.4%. The contribution reduces the imbalance without a sale but does not fully restore the target. Calculate the remaining gap rather than assuming any contribution solves it.

Keep a record of implementation

Before trading, estimate taxes, commissions, spreads and currency conversion. Decide whether income payments or future contributions can do part of the work. Record the reason, target weights and actual fills. If a fund's mandate has changed, restoring its old weight may not restore the intended exposure. Rebalance the economic allocation, not merely the familiar ticker list.

Try it yourself

A $20,000 portfolio is 70% equities and 30% bonds. Ignoring costs and taxes, how much must move from equities to bonds to reach 60% and 40%?

Show the worked answer

Equities are $14,000 and bonds $6,000. The targets are $12,000 and $8,000, so $2,000 must move from equities to bonds.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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