What Is Portfolio Rebalancing? Target Weights Explained
Portfolio rebalancing restores a mix you already chose. If one holding grew faster than the other, its weight drifted up. The trade that puts weights back is simple: target weight times the total, minus what you already hold. That is arithmetic, not a view on which name is better.
Key takeaways
- Trade = target weight × total value − current value.
- Targets must add to 100%. They are not scaled to fit.
- A positive trade is a buy; a negative trade is a sell.
- Contribution-only mode uses new cash to buy underweights and never sells.
The formula
Trade = target weight × total value − current value
Total value is the sum of the holdings plus any new cash you type. $6,000 in one name and $4,000 in another, with 50/50 targets, means the first is $1,000 overweight and the second is $1,000 underweight. Buy $1,000 of the second by selling $1,000 of the first.
60% and 40% is a complete mix. 60% and 30% is not. The missing 10% is not filled in, because scaling in silence would change every trade.
Run the same 50/50 example in the rebalancing calculator.
Contribution-only
Sometimes the rule is “add cash, do not sell.” New money buys the names that sit below target. Overweights stay put. If the contribution cannot reach every target, leftover demand stays unmet rather than forcing a sale. Leftover cash is shown when every target is already met.
That mode does not claim to be better. It is a constraint: no sells.
What rebalancing tells you
It sizes the trades that would restore the mix you typed, given today’s values. Drift is a description of the past path, not a forecast.
What rebalancing leaves out
The calculator does not know about taxes, trading costs, or whether a name is even tradable. It does not pick targets for you. Two names such as Apple and Microsoft can stand in for a two-asset mix in an example; their live market caps are not a recommended 50/50. Type your own values.
Rebalancing is also not a return statistic. For a lump-sum path use CAGR; for dated deposits use XIRR. Putting dividends back to work is a different mechanic — see DRIP.
For general education only. Nothing here is investment advice.
Frequently asked questions
- What is portfolio rebalancing?
- Rebalancing restores the mix you chose. Trade equals target weight times total value, minus what you already hold. $6,000 and $4,000 with 50/50 targets means sell $1,000 of the first and buy $1,000 of the second. The MarketCapLens rebalancing calculator uses this formula.
- Why must target weights add to 100%?
- The leftover is not filled in for you. 60% and 40% is fine. 60% and 30% is not — the missing 10% would silently change every trade if it were scaled. Type a complete mix.
- What is contribution-only rebalancing?
- New cash is used to buy underweights. Overweights are never sold. If the contribution cannot reach every target, leftover demand stays unmet rather than forcing a sale.