Rebalancing: Calendar vs Threshold, and What a 5% Band Costs

What each rule decides, and how drift is measured

A calendar rule says when to look. A threshold rule says how far the portfolio may drift before you act. A hybrid applies both, trading on a band but reviewing on a date regardless. The failure modes are opposite: a calendar that is too sparse lets the portfolio drift far between dates, and a band that is too tight turns ordinary market noise into trades.

Drift is the current weight minus the target weight, both computed on the portfolio’s current value:

• current weight of asset A = value of A / total portfolio value
• drift = current weight - target weight
• trigger: |drift| >= band

An asset below its target drifts as far as one above it, so a band that only watches the upside is half a rule.

The ambiguity sits in the band. A band of 5 can mean 5 percentage points, which on a 60% target allows the weight to reach 65%, or 5% of the target, which allows 63% because 5% of 60 is 3 points.

Worked example: two assets and a 5% band

Start with $10,000 split 60/40, so $6,000 in asset A and $4,000 in asset B. The band is 5 percentage points.

Asset B does not move. Asset A rises to $7,200:

• total value: 7,200 + 4,000 = 11,200
• A’s weight: 7,200 / 11,200 = 64.286%
• drift: 64.286 - 60 = +4.286 points, below the 5-point band, so no trade

Asset A rises further, to $7,700:

• total value: 7,700 + 4,000 = 11,700
• A’s weight: 7,700 / 11,700 = 65.812%
• drift: 65.812 - 60 = +5.812 points, above the band, so the rule triggers

The trade returns A to its target weight, not to the edge of the band:

• target A: 0.60 x 11,700 = $7,020
• target B: 0.40 x 11,700 = $4,680
• sell: 7,700 - 7,020 = $680 of A
• buy: 4,680 - 4,000 = $680 of B
• check: 7,020 + 4,680 = 11,700, and 7,020 / 11,700 = 60.00%

The trade moves $680, or 680 / 11,700 = 5.81% of the portfolio - slightly more than the 5-point band, because the sale returns to target rather than stopping at the trigger.

Calendar, threshold, and hybrid

Investor.gov says the calendar’s advantage is that it is a reminder, and the band’s is that your investments tell you when to act. It adds that rebalancing tends to work best on a relatively infrequent basis, with six or twelve months commonly suggested.

The hybrid is not a compromise for its own sake. A band alone leaves no scheduled review in a slowly drifting market; a calendar alone leaves you holding a position that moved 15 points because the date is three months out. A band with an annual backstop bounds both.

Why “rebalancing locks in gains” is only half true

The SEC’s guide puts it plainly: by cutting back on the current winners and adding to the current losers, rebalancing forces you to buy low and sell high. The missing half is arithmetic.

Take the $680 of A the rule sold. If A then rises 10% while B does not move, that $680 would have been worth 680 x 1.10 = $748, so the trade gave up $68. If A falls 10% instead, the $680 avoided 680 x 0.10 = $68 of loss. Before costs the outcomes are symmetric; after costs the switch is negative.

What the trade locks in is the weight, not a gain: it converts an unknown future mix into a known one at a price paid today.

How transaction costs set the band width

With a two-asset portfolio and drift exactly at the band, each leg is about band x portfolio value, and there are two legs:

cost per trigger ≈ 2 x band x value x cost rate

On a $10,000 portfolio with a cost of 0.10% per side:

A wider band costs more each time it fires and fires less often. The width that minimizes total cost sits where the extra drift you tolerate equals the trading cost you save, and both sides depend on asset volatility and your own cost per trade. No guide can hand you that number.

The cost rate is not only commission. The guide says to consider whether the method will trigger transaction fees or tax consequences, and a realized gain in a taxable account is a cost with no line on a commission schedule.

Where the naive reading goes wrong

Reading a 5% band as one rule. Percentage points and percent of target are different triggers, and on a 60% target the second is tighter: the 5.812-point drift that fired above is well outside a 5%-of-target band of 3 points.

Measuring the weight against the wrong total. The denominator is the current value, including the asset that moved; the starting value makes a rising asset look larger.

Forgetting contributions. The guide lists redirecting new contributions to the under-weighted category as a method in its own right, and it rebalances without a sale.

Assuming more frequent is safer. A tighter band keeps weights closer to target and pays for it whenever the market wobbles; the SEC’s guidance points the other way.

What the sources say and do not say

Investor.gov’s Beginners’ Guide describes rebalancing as bringing the portfolio back to the original mix, lists three methods (sell the overweight and buy the underweight, buy only the underweight, redirect contributions), names the two timing approaches, and advises on fees and tax consequences. The Asset Allocation and Diversification page repeats the 60%-to-80% illustration and the buy-low-sell-high framing.

Neither page gives a band width, an expected number of trades, or a cost figure. The Understanding Fees illustration covers annual expense ratios on a hypothetical portfolio growing 4% a year for 20 years, not the cost of a rebalance. Any band and cost per trade here come from your own schedule.

Practical checklist

• Write the band in one convention: percentage points or percent of target.
• Compute weights on current total value and test the absolute drift on both sides.
• Return to target, not to the band edge, and expect a trade slightly larger than the band.
• Price one trigger before choosing the width: two legs, each about band x value.
• Add the tax cost of realized gains in a taxable account.
• Rebalance with contributions where you can, and keep a calendar backstop.

How these sources were checked

Investor.gov, Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing (https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset), retrieved 2026-10-23, for the definition of rebalancing, the three methods, both timing approaches, the six- or twelve-month suggestion, the advice on fees and tax consequences, and the buy-low-sell-high framing. Investor.gov, Asset Allocation and Diversification (https://www.investor.gov/introduction-investing/getting-started/asset-allocation), retrieved 2026-10-23, for the 60%-to-80% illustration and the advice that rebalancing works best when relatively infrequent. Investor.gov, Understanding Fees (https://www.investor.gov/introduction-investing/getting-started/understanding-fees), retrieved 2026-10-23, cited only to show what it measures.