Portfolio drift, risk, and rebalancing
Portfolio weights move as assets earn different returns. A written policy can distinguish planned rebalancing from short-term reactions to market headlines.
Learning objective
Calculate portfolio drift and identify costs and tax questions before a rebalance.
Measure the drift
For each asset category, divide its current value by the portfolio total. Compare those weights with a stated target or permitted range. A position’s dollar gain is not the same as its contribution to total portfolio risk; correlations and volatility matter too.
Choose a review rule before the result
A policy may use a calendar review or pre-set weight bands. Contributions can sometimes move a portfolio toward target without selling, while sales may create fees or tax consequences. The method depends on account rules and personal circumstances.
Check what the percentages conceal
Funds can overlap within the same category, and a broad category can still contain concentration. Revisit time horizon, cash needs, and risk capacity after a material life change. Rebalancing restores a chosen exposure; it does not guarantee a return or identify the next market move.
Worked example
A fictional $1,000 portfolio begins at 60% equity and 40% bonds. Equity rises 20% while bonds are unchanged.
| Category | Starting value | After scenario | New weight |
|---|---|---|---|
| Equity | $600 | $720 | 64.3% |
| Bonds | $400 | $400 | 35.7% |
| Total | $1,000 | $1,120 | 100% |
Fictional figures for practice only; they are not a forecast or recommendation.
Try the workflow
- Read the fictional scenario and identify the decision or constraint.
- Write down what information is known, estimated, and still missing.
- Choose one next step and say what could change your conclusion.
Practice prompt: If the written target remains 60/40, calculate the target dollar values for a $1,120 portfolio. Before changing anything, list one fee or tax question to check.
Your practice response stays in this page and is not saved.
Check your understanding
Choose an answer, then read the explanation before you mark the lesson complete.
Read the source
Investor.gov — Allocation, diversification, and rebalancing ↗
This lesson is educational and uses a fictional example. Verify current details with the linked source and seek qualified advice for personal decisions.
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