Drift

Set a portfolio's mix today, and by tomorrow it will already be slightly different. Prices never move by the same amount at the same time. A stock that gains 2% while a bond gains nothing has just made the portfolio a little more equity-heavy than it was yesterday, without a single trade taking place.

That gradual, unforced deviation from the original target is drift. Left alone for long enough, drift can turn a carefully chosen 60:40 mix into something quite different — usually more concentrated in whichever asset class has been rising, which is also usually the riskier one.

Section 21.1 explains why drift happens: prices of high-return assets change faster than low-return assets, so the portfolio's actual mix deviates from its target weights over time. High-return assets are also typically higher risk, so an un-rebalanced, drifting portfolio does not just look different from its target — it becomes more concentrated and more risky than originally intended, undermining the diversification the target mix was built to deliver.

Drift is the problem that rebalancing — defined in section 21.2 as "the process of aligning portfolio weights to the strategic asset allocation" — exists to fix. How much drift is tolerated before action is taken depends on the rebalancing policy: time-based (calendar) rebalancing ignores the amount of drift and resets on a fixed schedule; threshold-based rebalancing sets a corridor around the target and only acts once drift breaches it. Section 21.4 notes that a pure Buy and Hold approach — deciding the mix once and doing nothing thereafter — generally increases market risk over time, precisely because it lets drift run unchecked, with no cap on how far the portfolio can move from target.

Illustrative figures. An investor sets a 70% equity / 30% debt target on a Rs 50,00,000 portfolio: Rs 35,00,000 in equity, Rs 15,00,000 in debt.

Over two years, with no rebalancing, equity grows 40% to Rs 49,00,000 while debt grows 8% to Rs 16,20,000. Total portfolio = Rs 65,20,000; equity weight = 49 ÷ 65.2 = 75.2% — drifted 5.2 percentage points above the 70% target, purely from unequal growth, with no trade made by anyone.

If a market correction then hits equities particularly hard, the now-75.2%-equity portfolio has more exposure to that correction than the original 70% target intended — the drift has quietly raised the portfolio's risk beyond what the investor actually agreed to. A rebalancing trade selling roughly Rs 3,39,000 of equity into debt would restore the 70:30 mix; a policy that never rebalances lets the drift, and the risk that comes with it, keep compounding.

Chapter 21 (Portfolio Rebalancing), sections 21.1–21.2, introduce drift as the reason rebalancing is needed at all, and section 21.4 links drift directly to the risk profile of a Buy and Hold strategy. Expect a question on why drift increases portfolio risk, or one computing a drifted weight from stated asset-class growth rates.

• Drift is caused by unequal price movement, not by cash flows in or out of the portfolio — a client's deposit or withdrawal changes weights too, but that is a separate rebalancing trigger from market-driven drift.
• Drift generally pushes a portfolio toward more risk, not less, because higher-return assets are typically higher-risk and are the ones gaining weight.
• Buy and Hold does not prevent drift — it deliberately allows it, in exchange for no trading costs and unlimited upside; Constant Mix is the opposite "do something" strategy that actively resets weights to stop drift.
• A corridor sets the tolerance for drift; it is not the same thing as drift itself — drift is the deviation, the corridor is the permitted range for that deviation.