Hong Life CalculatorsUnderstanding the portfolio rebalancing calculator — concept and principle
Over time, assets that rise faster take up a larger share of a portfolio, so the mix drifts away from the allocation you chose. Rebalancing means buying or selling to restore the target weights. This calculator takes the current value and target percentage of up to three assets, plus any new cash, and shows how much to buy or sell of each.
How it is calculated
- Total after rebalancing T = sum of current values + new cash.
- Current weight of asset j = value ÷ (T − new cash).
- Target value = T × target %.
- Trade = target value − current value: positive means buy, negative means sell.
Targets must add up to 100%.
The principle
Your target allocation reflects how much risk you want. When stocks outperform, the portfolio quietly becomes riskier than intended; rebalancing restores the chosen risk level. It also enforces a discipline of trimming assets that have risen and adding to those that have fallen. Adding new cash to the underweight assets moves the mix toward target without selling, which avoids transaction costs and, in taxable accounts, realising gains.
Worked example
Default inputs: asset 1 $70,000 (target 60%), asset 2 $25,000 (30%), asset 3 $5,000 (10%), no new cash.
- Total: 70,000 + 25,000 + 5,000 = $100,000.
- Current weights: 70%, 25%, 5%.
- Asset 1 target 60,000 → sell $10,000.
- Asset 2 target 30,000 → buy $5,000.
- Asset 3 target 10,000 → buy $5,000.
Sells and buys net to zero when no cash is added.
How to read the result
Small differences are often not worth trading because of costs. Common approaches are rebalancing on a calendar (for example yearly) or when a weight drifts beyond a band, such as 5 percentage points. Research by fund companies suggests that the exact frequency matters less than doing it consistently.
Common mistakes
- Targets that do not add up to 100%.
- Selling in a taxable account without considering capital gains.
- Rebalancing too often and paying needless trading costs.
- Forgetting to include all accounts that hold the same asset class.
Frequently asked questions
How often should I rebalance?
Many investors rebalance yearly or when an asset drifts more than about 5 points from target.
Can I rebalance without selling?
Yes, by directing new contributions to the underweight assets; enter them as new cash.
Does rebalancing raise returns?
Its main purpose is controlling risk; it may lower or raise returns depending on markets.
Sources: Vanguard, "Best practices for portfolio rebalancing" (2010 research paper) · Bodie, Kane and Marcus, Investments (asset allocation)