Time-based (calendar) rebalancing

The easiest way to rebalance a portfolio is to pick a date and stick to it. That is time-based, or calendar, rebalancing.

On the chosen date — say, the end of every quarter — the manager resets the portfolio back to its target weights. It does not matter whether the portfolio has drifted a little or a lot. The date decides, not the drift.

This is simple and needs no constant monitoring. Its weakness is that same simplicity: the schedule ignores what the market has actually done, so the portfolio can sit far from target for months before its next reset.

The workbook (section 21.3) names four common calendar frequencies for time-based rebalancing: monthly, quarterly, half-yearly or annually, and calls quarterly rebalancing a 'popular choice.'

The workbook's own trade-off (section 21.3.1): time-based rebalancing 'does not require monitoring of the portfolio during the rebalancing period,' which is its advantage over threshold-based rebalancing. But 'it does not take into consideration the fluctuations in the market' — on the rebalancing date itself, the portfolio might be sitting very close to its strategic mix, making the trade largely unnecessary cost, or very far from it, meaning it drifted, unwatched, into a different risk profile for the whole period in between. The workbook gives no numeric example of how far a calendar-rebalanced portfolio might drift between dates.

Illustrative figures. A retirement portfolio worth Rs 1,00,00,000 targets 65% equity / 35% debt, rebalanced quarterly — one of the workbook's four named frequencies.

At the end of Quarter 1, equity has drifted only slightly, to 66.1%. The manager rebalances anyway, on schedule, selling a small Rs 1,10,000 of equity — a trade that arguably was not needed yet.

A sharp rally then pushes equity to 74% of the portfolio well before Quarter 2 ends. Because the policy is calendar-based, nothing is done until the scheduled date. By then the portfolio has carried meaningfully more equity risk than the 65% target intended, for weeks, purely because the calendar rather than the drift decided when to act.

Chapter 21 (Portfolio Rebalancing), sections 21.3 (Periodicity of rebalancing) and 21.3.1, name the calendar frequencies, call quarterly rebalancing popular, and set out the advantage (no monitoring) and drawback (ignores market fluctuation) of time-based rebalancing against the threshold-based alternative. Expect a question asking which rebalancing method needs constant monitoring, and which ignores drift between dates.

• Time-based rebalancing is simpler but ignores actual drift; threshold-based rebalancing is more complex but responds to drift directly — the workbook frames these as the two alternatives to compare.
• Quarterly is the workbook's example of a 'popular choice', not a rule that quarterly is always correct.
• The main drawback is timing risk: on the rebalancing date the portfolio may be close to target, wasting the cost of the trade, or far from it, having drifted unchecked — the calendar cannot tell which case it is in.
• Do not confuse this with Buy and Hold, which never rebalances at all — time-based rebalancing does reset the mix, just on a schedule rather than a trigger.