# Portfolio rebalancing

Portfolio rebalancing is adjusting holdings to bring a portfolio’s current weights closer to chosen target weights after prices or circumstances change.

## What it means

Over time, price changes can shift a portfolio away from its intended mix. Rebalancing means comparing current holding weights with target weights and deciding whether to adjust the holdings. Targets might cover individual stocks, sectors or asset classes. A portfolio can also drift when cash is added or withdrawn, even if prices do not change.

A review can follow a calendar, such as every quarter, or a threshold, such as when a weight differs from its target by a chosen number of percentage points. Neither method requires a trade at every review. Adding cash to underweight holdings, if cash is available, is another way to narrow a gap without selling existing positions.

## How it is calculated

For a simple stock portfolio, calculate current weights and the dollar change needed to reach each target:

`Current weight (%) = (current holding value / total portfolio value) × 100`

`Target dollar change = (target weight / 100 × portfolio value) − current holding value`

- **Current holding value:** Shares held multiplied by the current price, in US$.
- **Total portfolio value:** The sum of holding values and any cash included in the allocation, in US$.
- **Current weight:** The holding’s share of that total, expressed as a percentage.
- **Target weight:** The chosen percentage allocation for the holding; all target weights, including any target cash weight, should sum to 100%.
- **Target dollar change:** The approximate US$ amount to add if positive or reduce if negative.

These are *pre-cost* calculations. Commissions, spread, market impact, taxes and price changes can make the final weights differ from the targets. For share orders, the dollar changes must also be translated into quantities the broker permits.

## Worked example

Consider a hypothetical US$10,000 stock portfolio with no cash and two holdings. Its target is 50% in Stock A and 50% in Stock B. Following hypothetical price changes, A is worth US$6,000 and B is worth US$4,000.

1. **Calculate current weights:** A is US$6,000 / US$10,000 = 60%; B is US$4,000 / US$10,000 = 40%.
2. **Calculate target values:** Each target is 50% × US$10,000 = US$5,000.
3. **Find the differences:** A’s target dollar change is US$5,000 − US$6,000 = −US$1,000. B’s is US$5,000 − US$4,000 = +US$1,000.
4. **Translate amounts into shares:** If A costs US$100 per share and B costs US$50 per share, the illustrative adjustment is to sell 10 A shares and buy 20 B shares.

At those unchanged prices, and ignoring costs and taxes, the resulting holdings would each be worth US$5,000. Actual fills may produce different values; this example is arithmetic, not a proposed trade.

## Why it matters before you trade

A rebalance may reduce a gap between current and target weights, but the trades themselves have costs and risks. Selling and buying can incur spreads, commissions, market impact and, depending on the account and jurisdiction, taxes. An intended US$1,000 adjustment in a thinly traded stock may be harder to execute near the displayed price than the same amount in a liquid stock.

Before placing orders, it helps to distinguish allocation drift from execution feasibility. Check the proposed quantities against available cash, liquidity, daily volume and concentration. If several lines are involved, review the basket as a whole: reducing one holding while adding another changes both position weights and sector exposure. Rebalancing does not ensure lower risk or better returns.

## How PreTrAIde uses it

PreTrAIde does not claim to set target allocations or automatically rebalance a portfolio. Its pre-trade analysis can examine a proposed stock basket before the user places orders: each line has a buy or sell side, quantity and execution conditions. It returns GO, NO-GO or MODIFY verdicts for the basket and each line, alongside a model-estimated success probability, risk assessment, suggested execution strategy and plain-language reasoning. Those verdicts are decision support, not recommendations.

The quantitative layer includes estimated spreads, participation in daily volume, market impact, portfolio breakdowns and concentration measured with the Herfindahl-Hirschman index. These checks relate to the trading and concentration implications of a proposed rebalance. PreTrAIde never places orders; users trade through their own broker.

## Common mistakes

- Treating a target-weight calculation as an exact share order without accounting for prices, permitted share quantities or costs.
- Ignoring cash when calculating portfolio value and target weights.
- Assuming every small deviation requires a trade, regardless of execution costs or taxes.
- Looking only at individual weights while overlooking sector or country concentration.
- Confusing a pre-trade verdict about a proposed basket with advice to rebalance.

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Source: https://pretraide.com/glossary/rebalancing