Over time, portfolio holdings drift in value. Rebalancing aligns the portfolio holdings back to the target weights.
The rebalancing option is set independently for each portfolio, and it is saved/restored with the portfolio.
The target weights used are the ones shown in the 'Weight' column of the portfolio positions table.
Portfolio Lab simulates two kinds of rebalancing: Calendar (rebalancing at fixed dates) and Tolerance (rebalancing occurs when weights drift beyond a user specified tolerance). Click on the choice box next to "Rebalance:" to choose a rebalancing strategy.
In these strategies, Portfolio Lab rebalances the portfolio at fixed time intervals:
Rebalancing is done on the last day of each period. For example, quarterly rebalancing is done on the last day of the quarter.
In these strategies, Portfolio Lab rebalances the portfolio as soon as one or more of the positions weight drifts away from its target value:
- 100% tolerance
- 50% tolerance
- 25% tolerance
- 10% tolerance
The trigger value is relative to the position weight. For example, a 40% position with 10% tolerance will be rebalanced when it reaches 36% or 44%.
Viewing the rebalancing transactions
To view the details of rebalancing operations, you may either:
- select the Value chart and click on 'rebal' to show the rebalancing dates
- select the Log view to display the details of dates and transactions
In the current version of Portfolio Lab, the rebalancing does not take into account transaction costs. In reality, transaction costs include brokerage fees, taxable capital gains and front-end/back-end loads for mutual funds, which may negatively affect the performance.