How a portfolio rebalances

On every rebalancing day—rebalance frequency sets when—the portfolio is rebuilt from the latest data in a single pass: select assets, weight them, build the hedge, combine, and switch. Each step is configured in its own part of the Portfolio Builder and has its own article; this one shows how they chain together into the allocation you see each period.

The Performance Portfolio's goals re-rank the universe defined by your asset selection, each metric measured over its own lookback. The top-ranked assets become the period's selection, with ranking inertia protecting current holdings from being rotated out by marginal newcomers.

The optimisation method turns the selection into weights, estimating risk—and, for the Markowitz methods, expected return—over its own lookback, within your constraints. Allocation inertia and the transaction-cost penalty both discourage large weight changes, so the new weights lean towards the old ones unless the data argues otherwise.

If the Hedge Portfolio is on, the same select-and-weight happens a second time, with one difference: its correlation goal metric is measured against the Performance Portfolio just built, so the hedge selects assets that move independently of it, or against it—see Performance and Hedge portfolios.

A second optimisation sets the split between the two parts, within the Performance Portfolio Allocation bounds set in the constraints. The two sets of weights, scaled by that split, become one overall allocation; an asset selected in both parts is simply held at its combined weight.

The whole decision uses data up to the close of the rebalance day. The old allocation applies through that close; the new one applies from the open of the next trading day—the boundary is described precisely in Rebalance frequency. The trades that move the portfolio from old to new generate turnover, and transaction costs, if switched into returns, are deducted on that day. Implementing the same switch in your own trading account is the investments side of pfolio—see Investing your portfolio and Rebalancing your portfolio.

How dramatic each pass is depends on the reactivity controls: how often it runs, how much history it sees, and how strongly it resists change—see Controlling turnover and adaptation speed. A portfolio that rebalances often, looks back briefly, and carries no inertia rebuilds itself eagerly; one with the opposite settings changes only when the evidence is overwhelming.