Portfolio rebalancing, Part 1: The ideal rebalancing range

Executive summary:

  • The ideal rebalancing range varies by investor and depends on an investor’s risk tolerance and market views, among other factors. 
  • In a prolonged equity bull market, wider rebalancing ranges will result in higher returns, but also increase a portfolio’s risk. 
  • Russell Investments’ flexible platform for trading physical and synthetic instruments within a total portfolio context can help clients identify their preferred rebalancing range. For investors who wish to remain close to their strategic asset allocation, our derivative overlay program can help achieve this with minimal trading.

Editor’s note: This is the first of a three-part series on the topic of portfolio rebalancing.

I work on a team that provides portfolio solutions for some of the world’s largest institutional investors. Since many of our solutions involve analysing total portfolio exposures and risks, our team spends a lot of time thinking about rebalancing. Here’s a common question we get from clients: what is the ideal rebalancing range?

This is a good question. And a tough one. In some sense it’s like asking what is the ideal return target? Or what is the ideal level of portfolio risk? The answer to all of these is it depends. The qualifier “ideal” implies a value judgment. So, what do you value more – higher returns or lower risk? Let’s take each of these in turn.

Higher returns

During a prolonged bull market for equities, wider rebalancing ranges will result in higher returns. In such a market environment, portfolios that allow equities to drift higher (portfolio drift is primarily caused by equity returns) will outperform those that rebalance more frequently (i.e., momentum will exceed mean reversion). For clients who expect such a trend and wish to express such a view in their portfolio, we recommend wider rebalancing ranges (e.g., +/-5%). Utilising an asymmetric rebalancing range may also be warranted such that equities are allowed to drift higher but not much lower (e.g., -1% to +5% range). Keep in mind that this would add a bullish bias to risk management.

Since all portfolio decisions involve a tradeoff, the pursuit of higher returns from momentum must also consider the risk side of the equation. Allowing the riskier assets in the portfolio to appreciate above the target weights of the strategic asset allocation (SAA) will increase the total risk of the portfolio and the risk relative to the benchmark policy portfolio.

Ultimately, clients who express momentum tilts are expecting to be compensated for the extra risk. In a worst-case scenario, it’s the risk of being overweight equities heading into a major market correction. Investors who were at the upper range of their exposure to equities heading into the 2020 global pandemic underperformed their SAA (and likely their peers). Sticking with this plan required buying equities when conviction to do so was most challenged from a human behavioral perspective. Since it’s terribly difficult to predict major turning points in the market, we’d suggest constructing a decision matrix for the recommended course of action should certain scenarios unfold. As with any tactical position, plan your exit strategy before you enter the trade.

Lower risk

For investors without conviction in deliberately diverging from the SAA, market drift represents an uncompensated risk without an expected return. Absent a market view, consistently hold the maximal weight of return-seeking assets that you can tolerate (as specified in the SAA), but no more. If it were free and automatic to rebalance the portfolio to the SAA, then a solid argument could be made to do so continuously. But rebalancing involves decision-making resources, transaction costs, and operational complexities that must also be weighed. In addition, perfect data is not always available daily (including the impact of valuation lags on private market assets, a topic for a future segment of this series).

Since there’s a non-zero cost of perfection, allowing a small amount of drift in the portfolio (e.g., 1-2%) tends to balance complexity, transaction costs, and risk – and possibly capture some positive mean reversion effects. Fully rebalancing to the SAA on a monthly cadence (in line with the monthly calculation of the benchmark policy portfolio) will further reduce the risk of undesired exposures. If lower absolute risk is a consideration along with minimising risk relative to policy, a bearish bias could also be embedded with an asymmetrical rebalancing range (e.g., -5% to +1% range). This would limit situations of trying to “catch a falling knife” during market drawdowns.

If you don’t have a view about whether markets are trending or mean reverting, then take the emotion out of the rebalancing decision and use a disciplined approach to stay reasonably close to the SAA, such as rebalancing monthly.


As a provider of portfolio solutions, our team wants to help clients implement their views. These can take several forms, including distinct strategies such as a downside protection hedge around a certain event, scenario, or time horizon. Or ongoing strategies such as capturing the market risk premium on cash held for liquidity, or the potential premium from momentum. Without any tactical insights, assume the SAA is optimal and implement a completion strategy that best captures it.

Because of our flexible platform for trading physical and synthetic instruments within a total portfolio context, we can walk through the pros and cons of these strategies with clients. Since that platform includes the operational firepower to handle the day-to-day complexities along with clear reporting, we can demonstrate that desired outcomes are achieved over time. With these tools at our disposal, we can help clients find their ideal rebalancing range.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.