Because the market skews weights away from target, making overall risk different from the original intention.

How often should I rebalance?

Depends on approach: on a periodic schedule, or when weights skew beyond a set threshold. What matters is having a rule.

How does capital allocation differ from position size?

Position size handles one trade's size by its risk; capital allocation handles the whole picture, so no trade and no total of open trades takes too large a risk.

Rebalancing and Capital Allocation

What rebalancing and capital allocation are

Rebalancing is bringing a portfolio back to its target weights after the market has skewed it. Capital allocation among trades is deciding how much capital to put into each opportunity, so no single trade takes too large a share.

Why it matters

Over time, assets rising and falling differently skew the portfolio's weights away from the original target; the strongly rising part gradually takes a larger weight and brings more risk than intended. Rebalancing returns the portfolio to the chosen risk level. Sensible capital allocation among trades keeps any single opportunity from causing excessive harm.

How to apply it

Periodically, or when weights skew beyond a threshold, bring the portfolio back near the target allocation by reducing what's grown and increasing what's shrunk. For capital allocation among trades, keep each position's weight within a limit so one wrong call doesn't cause heavy harm, and consider the total risk of simultaneously open trades. The general principle is discipline and rules, rather than acting on market emotion.

Common mistakes

Never rebalancing, letting the strongly rising part take too large a weight and quietly increase risk.
Putting too much capital into one trade out of overconfidence.
Rebalancing so often it incurs unnecessary costs and taxes.
Ignoring the total risk of many simultaneously open trades, even if each seems small.

FAQ

Why rebalance? Because the market skews weights away from target, making overall risk different from the original intention.
How often should I rebalance? Depends on approach: on a periodic schedule, or when weights skew beyond a set threshold. What matters is having a rule.
How does capital allocation differ from position size? Position size handles one trade's size by its risk; capital allocation handles the whole picture, so no trade and no total of open trades takes too large a risk.

Checklist

☐ Has my portfolio skewed from its target allocation?
☐ Do I have a rebalancing rule, or act on impulse?
☐ Does no single trade take too large a weight?
☐ Is the total risk of open trades within limits?