The rebalancing wiki page describes deviations from the target by a certain

**absolute percentage**:

=> ABS(Y-X) > 5% would be a typical formula to implement this, with a 5% threshold

The wiki page also describes deviations from the target by a certain

**relative percentage**:

=> ABS(Y/X-1) > 15% would be a typical formula to implement this, with a 15% threshold

Let’s take a scenario where the asset category of interest varies by 25% (upwards or downwards). To keep the discussion symmetric, we need to remember that a 25% rise is the same variation as a 20% drop. (1/(1+25%)-1 = -20%). In other words, after a 25% rise, a 20% drop would bring the price to the same point, and conversely. Ok, so say we have a 25% price variation on our asset category (SCV, REIT, bonds, all equities, whatever), seems like time to rebalance!

On another thread, Kevin nicely illustrated the fact that both the absolute percentage approach and the relative percentage approach display idiosyncrasies, and that the outcome is quite dependent on the exact Asset Allocation (X%). Let me show the same effect while using slightly different graphs.

Let’s assume that the asset category varies by 25%, while the rest of the portfolio does nothing (not fully realistic, but this helps the thinking). See the first graph below, if the target allocation is less than 30% of the portfolio, the relative band threshold is reached. Otherwise, it is NOT. That doesn’t seem terribly satisfying; the price of the asset category tanked or increased by a good deal (25%), whether you have a small or a large investment in this category, it seems like time to rebalance. Even if we were to assume that the rest of the portfolio actually went up, the curve would shift a bit, but this remains unsatisfying, notably with high allocations.