Rebalancing

Explanation

Rebalancing is the process of realigning portfolio weights back to their targets. If a target allocation is 60% stocks and 40% bonds, and strong equity returns push the mix to 70/30, rebalancing sells stocks and buys bonds to restore 60/40.

Rebalancing enforces a buy-low-sell-high discipline without requiring market timing. After a sector crashes, it becomes underweight and the rebalancer adds to it. After a sector rallies, it becomes overweight and the rebalancer trims it.

Vanguard research shows that rebalancing reduced portfolio volatility by 1–2 percentage points annually over multi-decade periods with minimal impact on returns. The primary benefit is risk control, not return enhancement.

Example

A portfolio targets 10% weight in each of 10 sectors. After a quarter, the technology sector has grown to 15% while energy has shrunk to 6%.

Without rebalancing, the portfolio would drift toward an increasingly concentrated technology bet. Rebalancing maintains the original diversification intent and captures the mean-reversion tendency of sector returns.

How Stoquity Uses This

Stoquity runs its rebalancing engine daily for all active portfolios. The engine compares current holdings to the AI-generated target allocation, calculates required trades, and passes them through the Investment Committee for approval. Rebalancing trades are visible in real-time on the Trade Log.

Common Mistakes

• Rebalancing too frequently can increase transaction costs and tax drag
• Calendar-based rebalancing (quarterly) is simpler but less responsive than threshold-based rebalancing
• Rebalancing does not improve returns in a strong trending market—it systematically trims your best performers