Introduction
Portfolio rebalancing, once thought of as a necessity that occurred once a year, perhaps after a client review, or just ‘because’, is a process that has changed dramatically since the rise of Discretionary Fund Management (DFM) and Model Portfolio Services. Whilst on the surface it may seem an innocuous act, and nothing more than an adjustment of underlying asset weightings to keep the respective portfolio within its risk tolerance, it is instead a powerful tool that can provide numerous benefits to investors.
But what exactly is portfolio rebalancing? Over time, the assets in a portfolio will almost certainly grow at different rates. This is true for portfolios constructed of equities and bonds, but even within these asset classes there’s variation to be seen. Rebalancing is the process of realigning the weightings of a portfolio’s assets, by buying and selling, to maintain the target asset allocation. It is an important part of disciplined investment management, helps investors control risk, and to stay aligned with their long-term financial goals.
Consider a practical example: suppose an investor holds a simple portfolio allocated 70% to equities and 30% to fixed income. Over time, strong equity performance causes the equity allocation to rise to 74%, while fixed income falls to 26%. Recognising that this shift may no longer reflect the investor’s intended risk profile, the investment manager may decide to rebalance. To restore the portfolio to its target 70/30 allocation, 4% of the equity holdings would be sold, with the proceeds used to purchase fixed income assets. Once this has happened, the portfolio has rebalanced and can continue to (hopefully) increase in value at the appropriate risk level. Whilst there are advantages to rebalancing, such as:
• Controlling risk by maintaining your preferred risk-return profile
• Encouraging disciplined investing and preventing emotional decisions
• Enforcing buy low, sell high behaviour
However, it can also have some potential downsides, such as:
• Transaction costs when trading
• Capital Gains Tax implications for taxable accounts (for example GIAs)
• Requires monitoring and management (depending on the method of rebalancing, more on this later…)
There are two main methods to rebalance portfolios: calendar-based and tolerance-based rebalancing. Let’s first discuss the more traditional and widely known method, calendar (or ‘date-based’) rebalancing.
Calendar-Based Rebalancing
Calendar-Based Rebalancing (CBR) is a rebalancing methodology that occurs usually annually or quarterly. In the case of annual rebalancing, financial advisers would usually instruct a rebalance after a client’s annual review, regardless of the performance of the portfolio. Once a rebalance is instructed, the overweight assets are sold, and the underweight assets are bought to bring the asset allocation back to their targets. CBR is a common strategy employed by many investment managers, DFMs and financial institutions and has several positives:
• Simplicity and ease of implementation: CBR is easy to set up and automate. For example, an adviser might rebalance a client’s portfolio during their annual review or choose a fixed date when all client portfolios are rebalanced in one go. For many, this approach is straightforward and relatively stress-free. It also has the advantage of being easy to communicate—non-professional investors generally understand that a portfolio needs occasional adjustment, and the concept of doing this on a regular schedule isn’t hard to explain.
• It’s a disciplined approach: CBR promotes a consistent, rule-based process that takes the emotion out of portfolio management. By sticking to a set schedule, advisers can avoid reactive decision-making during periods of market volatility and apply a uniform approach across all clients. It creates structure, simplifies workflows and ensures portfolios stay aligned with risk profiles—without overcomplicating things.
• Operational efficiency: For firms managing large volumes of accounts (some clients may have multiple portfolios), CBR works well because it can be scheduled and automated in bulk. It aligns neatly with regular reporting and review cycles, making it easier to embed into existing processes without adding operational complexity.
CBR does, however, have drawbacks:
• Ignores Market Movements: As a date-based strategy, it completely ignores market movements, CBR may miss opportunities to fully capitalise on underlying asset performance when the market is over performing. In contrast, if the market faces high volatility, and a clients rebalance is not scheduled for some time, that client could unintentionally end up outside their intended risk profile.
• Dispersion: An unintended side-effect of CBR is returns dispersion. First brought to light in ebi’s 2013 whitepaper ‘Rule-based Rebalancing: A Fresh Approach for UK Financial Advisers’, and further explored in the 2025 paper ‘Tolerance Based Rebalancing: Data Not Date’, dispersion occurs when identical portfolios are rebalanced on different days, leading to differing outcomes. For example, consider two clients — one has their review and rebalancing triggered today, while the other’s review happens 10 days later. That timing gap alone could result in a difference of up to 0.69% in annualised returns (Johnston, 2025). It’s a subtle but important flaw that can undermine consistency across client outcomes.
• Unnecessary trades: CBR can trigger trades even when a portfolio remains well within acceptable tolerance bands or during times of minimal market volatility. This can lead to unnecessary buying and selling, increasing trading costs without delivering a meaningful adjustment to the portfolio’s risk profile. Over many years, these extra trading costs can add up.
Enter: Tolerance-Based Rebalancing
While CBR offers simplicity and structure, its drawbacks have led many to explore more dynamic, market led alternatives. Rather than relying on a fixed date, Tolerance-Based Rebalancing (TBR) is a strategy that monitors portfolio weightings, and their performance daily and only triggers a rebalance once asset weightings drift beyond predefined thresholds. It is a more flexible, data-driven and evidence-based approach that aims to retain, and ultimately, improve upon the benefits of rebalancing, whilst avoiding the inefficiencies that can arise through date-based strategies. There are many intricacies involved in TBR that we will discuss in the next blog in this series including asset groups, trigger portfolios and tolerance bands, so for now let’s explore a basic example of a tolerance-based rebalance.
Imagine a portfolio made of one bond and one equity fund split equally 50/50. This example strategy has a rule where if one fund drifts 20% above or below its allocation, a rebalance will trigger, and that’s it. That’s the whole process—it doesn’t matter if it’s a client’s review that day or if it’s the 3rd of October, or if it hasn’t rebalanced for 12 months. if a breach has not occurred, then no rebalance is instigated. It stays this way until, one day, the equity or bond fund reaches 40% or 60% of the portfolio value. This is a very simplistic scenario, and not one that ebi employs, but the general theory still applies. TBR is dependent on data, not date.
TBR presents a clear evolution from traditional rebalancing methods. It’s dynamic, responsive and more aligned with how markets move, and portfolios behave. While it introduces a few additional considerations around implementation, the benefits are significant. Let’s take a look at the key advantages to a TBR strategy, and a few things to keep in mind when adopting this approach:
• May enhance performance and reduces costs: Based on evidence-based research, TBR has shown to provide a returns premium for portfolios utilising this strategy compared to the same portfolios using CBR (Johnston, 2025). TBR does this by capitalising on natural market movements, delivering a consistent buy-low/sell-high effect. It can also lead to fewer trades than traditional methods, helping to reduce trading costs over time. This can then lead to a reduction in time out of the market, an often-forgotten side effect that occurs when assets are bought and sold, missing out on potential gains that could happen during that period.
• Responsive and data-driven: TBR responds to actual portfolio drift, not arbitrary calendar dates. Rebalancing is only triggered when asset weightings move beyond predefined tolerance bands, allowing portfolios to stay within a band around their intended risk profiles without constant interference. This makes TBR far more dynamic and market-aware than fixed-date strategies, helping advisers capture opportunities as they arise—rather than reacting too late or rebalancing unnecessarily.
• Eliminates Dispersion: Unlike CBR which creates return dispersion between otherwise identical portfolios, TBR offers a consistent client experience. All portfolios under a TBR strategy are managed to the same tolerance bands and are rebalanced at the same time. This results in uniform outcomes across clients, more accurate factsheets, and cleaner, more reliable reporting.
Whilst the advantages of TBR is compelling, there are a few things to consider:
• More difficult to implement: Unlike calendar-based approaches that can be scheduled manually, TBR relies on real-time monitoring of portfolio drift and the ability to trigger rebalances when specific thresholds are breached. This requires a higher level of technological infrastructure, including data feeds, automated workflows, and rebalancing logic that can operate daily. For firms without these systems already in place, implementing TBR can be resource-intensive — both in terms of development and ongoing oversight.
• Unpredictable scheduling: Unlike CBR, which can align neatly with annual reviews or reporting cycles, TBR operates on market movements. This can result in rebalances occurring at unexpected times, or during times of high market volatility.
• Requires clear client communication: TBR isn’t quite as intuitive as CBR, especially for clients used to rebalancing happening during an annual review. Because it’s driven by asset drift rather than dates, clients may need a clearer explanation of how tolerance bands work and why rebalances can occur at seemingly random points in the year. While the underlying logic is sound, there can be a learning curve — and advisers may need to spend more time upfront helping clients understand the benefits of a data-driven, responsive approach. It’s also worth noting that, depending on market conditions, tolerance-based rebalancing may lead to more frequent adjustments than a traditional calendar-based model.
While both rebalancing methods have their place, it’s clear that TBR offers a more dynamic and intelligent approach to portfolio management—one that aligns more closely with how markets move and how investors behave. Whilst it requires technology, a shift in mindset and a learning curve the benefits can speak for themselves.
ebi have been proponents of the TBR approach for many years, developing, testing and refining its approach to TBR to ensure it not only works in theory but delivers in practice. In the next blog, we’ll take a closer look at the research paper behind our strategy, including the simulation models we built, the data we used and what we learned along the way.
C. Johnson, 2025, ebi whitepaper, Tolerance Based Rebalancing: Data or Date.
Disclaimer
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Our publications do not offer investment advice and nothing in them should be construed as investment advice. Our publications provide information and education for financial advisers who have the relevant expertise to make investment decisions without advice and is not intended for individual investors.
The information we publish has been obtained from or is based on sources that we believe to be accurate and complete. Where the information consists of pricing or performance data, the data contained therein has been obtained from company reports, financial reporting services, periodicals, and other sources believed reliable. Although reasonable care has been taken, we cannot guarantee the accuracy or completeness of any information we publish. Any opinions that we publish may be wrong and may change at any time. You should always carry out your own independent verification of facts and data before making any investment decisions.
The price of shares and investments and the income derived from them can go down as well as up, and investors may not get back the amount they invested.
Past performance is not necessarily a guide to future performance.
Please note that tolerance-based rebalancing may occur more frequently than calendar-based rebalancing, depending on market conditions.
Blog Post by Chris Johnston, MSc
Data Analyst at ebi Portfolios
What else have we been talking about?
- Calendar-Based Rebalancing (CBR) vs Tolerance-Based Rebalancing (TBR)
- April Market Review 2025
- Ruffled Feathers: Exploring Black Swan Events
- Q1 Market Review 2025
- March Market Review 2025