Smart Portfolios: Part 4 - The Theory of Portfolio Rebalancing and Substitution

This episode offers an in-depth guide to portfolio rebalancing and repair, emphasizing the importance of minimizing trading costs against the uncertain benefits of adjustment. It details techniques for managing portfolio drift, which occurs due to price changes or dividends, by employing a No-Trade-Zone and a Minimum-Trade-Size to reduce turnover and transaction fees. The document also addresses complex rebalancing scenarios, such as asset substitution due to factors like model selection changes or corporate takeovers, outlining a cost-benefit analysis that incorporates tax considerations and the Rule of 20 for calculating the present value of future benefits. Finally, it presents a prioritized six-step plan for portfolio repair, aimed at correcting severely misaligned portfolios by first addressing major issues like under-diversification and high costs