Portfolio Rebalancing, explained.
Portfolio rebalancing restores target allocation weights after differing returns move a portfolio away from its intended mix. It is a rule for exposure, not a promise of outperformance.
Why it happens
When one holding grows faster, it becomes a larger share of total wealth. Restoring weights sells some of the overweight holding and reallocates to the other. Costs reduce wealth, and subsequent returns determine whether the trade helps or hurts this particular path.
Rebalancing restores a portfolio's target weights after unequal returns change its allocation. It manages exposure; it does not guarantee higher returns.
Read the result
Reveal a round, inspect the weight bar, and decide whether to rebalance. Compare your managed wealth with the untouched portfolio under exactly the same return shocks. Trading fees apply to the stated pre-fee one-way transfer.
A worked example
Restoring a balanced pair after unequal growth
Begin with 500 tokens in each asset, a 50/50 allocation.
If A rises 20% and B is unchanged, the amounts become 600 and 500, making A about 54.55% of the total.
A no-cost rebalance would transfer 50 and leave 550 in each. With the selected fee, the remaining total is slightly lower and is split equally.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Start with 500 tokens in each asset. Each round applies a fixed return to both managed and untouched holdings. Rebalance subtracts a fee based on the absolute pre-fee one-way transfer and splits the remaining managed wealth equally. Costs are cumulative; the benchmark never trades.
Where this idea is useful
A practical use
A strong gain in one asset can shift a balanced allocation toward that asset without an explicit decision to take more exposure.
A common misconception
“A rebalance automatically improves future returns.”
Restoring exposure can reduce an unwanted concentration, but the overweight asset may keep outperforming. Fees and taxes can also make trading costly.
What this explanation leaves out
- The fictional assets and six rounds do not represent a stock/bond forecast. The fee convention is simplified; taxes, bid-ask spreads, contributions, and optimal timing are omitted.
Why keep an untouched benchmark?
Both portfolios receive the same invented shocks. Their difference isolates the chosen reallocations and charges rather than comparing two unrelated market paths.
What allocation change have you accepted passively because a previous winner kept growing?
Associated thinkers
Associations marked provisional are awaiting source review.
Further reading
Explore the original research or the teaching reference behind this experiment.