Rebalancing

Markets move constantly, and even a carefully designed portfolio drifts over time. If stocks rise sharply, their share of the total portfolio grows beyond the intended target, increasing risk the family may not have chosen to take on. Rebalancing corrects that drift by trimming what has grown too large and adding to what has shrunk — mechanically enforcing the discipline of the strategic asset allocation.

Families typically rebalance on a schedule (quarterly or annually), when any asset class drifts beyond a defined band around its target, or both. Calendar-based rebalancing is simple to administer. Band-based — sometimes called threshold or tolerance-band — rebalancing only triggers a trade when drift becomes material, which can reduce unnecessary transaction costs and tax events. A well-run investment policy statement usually specifies which approach the family office will use.

Rebalancing carries real costs that families must weigh carefully: brokerage commissions, bid-ask spreads, and — importantly — potential capital-gains taxes when appreciated assets are sold. Families with significant taxable accounts commonly use incoming cash flows, dividends, or new contributions to rebalance organically, avoiding unnecessary sales. This is called "cash-flow rebalancing." Illiquid holdings such as private equity or direct real estate cannot be rebalanced on demand, which is one reason liquidity planning is treated as a distinct discipline inside a family office rather than an afterthought to portfolio management.