Rebalancing
Rebalancing is trading back to target weights after drift — a disciplined contrarian flow, with costs.
Definition
Calendar or threshold rules sell winners and buy losers to restore the policy mix. It harvests a diversification bonus if assets mean-revert relative to each other, and it spends spread and taxes. Leverage and illiquids make the rule harder.
Why it matters
Without it, a 60/40 becomes 80/20 after a long bull and you did not choose that risk. With it, you are a mechanical value trader at the asset-class level.
Case
Q1 2020: rebalance into equities as bonds rally and stocks crash. The rule hurt into March and helped the recovery. Non-rebalancers kept the safer mix and the lower return.
How to read it
Cost the trades and the tax. A 1% band on liquid futures is not the same rule as a 1% band on PE NAVs.