Maintenance✓ Mathematical
◆ The PatternMaintain target allocations through disciplined rebalancing
As prices move, actual weights drift from targets. Rebalancing is a contrarian mechanism — sell winners, buy losers — that harvests the diversification return. Two approaches: calendar (monthly, quarterly) and threshold (rebalance when drift exceeds a band).
Drifti = | wactual,i − wtarget,i |
Wider bands reduce transaction costs but increase tracking error. The optimal band depends on volatility, expected return differences, and trading costs.
// Interactive — rebalancing bands and drift over time
Band width %
Tax efficiency. Threshold-based rebalancing with tax-loss harvesting can add 20-50 bps annually.
Pattern bridge: Mean-reversion logic appears in Market Psychology.