Rebalancing

The two main approaches

• Calendar-based — rebalance on a defined cadence (quarterly, annual). Simple but mechanical; can rebalance unnecessarily or miss material drift.
• Threshold-based — rebalance when an asset-class weight breaches a defined band (e.g., target 60% equity, rebalance when outside 55-65%). More responsive to actual drift.

Many firms combine both — threshold triggers with a calendar minimum.

What a rebalance produces

1. Trades that restore weights toward target.
2. Tax consequences — realized gains and losses, especially in taxable accounts.
3. Transaction costs and bid-ask impact.
4. A timestamped record of the trigger, the analysis, and the result.

Tax-aware rebalancing

In taxable accounts, rebalancing trades trigger tax consequences. Best practice approaches:

• Direct new contributions and distributions to underweight asset classes first.
• Harvest losses to offset rebalancing gains where possible.
• Rebalance across tax-deferred and taxable accounts to minimize taxable trades.
• Consider the wash sale rule when harvesting losses.

What examiners check

• The IPS specifies the rebalancing approach and triggers.
• Trigger-based rebalancing has documented evidence of the trigger event.
• Calendar-based rebalancing has evidence the schedule was followed.
• Tax-aware decisions are documented when departures from mechanical rebalancing happen.

How StratiFi thinks about rebalancing

Rebalancing is where the IPS becomes operational. Done well, it's a connected workflow — drift monitored continuously, triggers fired automatically, trades executed with tax awareness, decisions logged with the rationale. Done badly, it's a calendar reminder that produces tax bills nobody planned for.