Investment allocation drift:
formula and worked example

What allocation drift is, and why portfolios do it on their own

You choose a target split between asset classes, say 45% in equities and 55% in bonds, because that mix matches your goals and tolerance for risk. Markets do not leave it alone. When equities rise faster than bonds, they become a bigger slice of the portfolio, so your risk level creeps up without you making a single decision. Allocation drift measures how far an asset class has moved from its target weight.

The point is control. A portfolio that has drifted is no longer the one you designed, and it may carry more risk than you intended just as markets are at a high. Measuring the drift gives a clear trigger for deciding whether to act.

Drift also hides in the details. A portfolio that looks balanced across equity and bonds can still be concentrated within equities, for instance in one country or one sector, so the same calculation is worth repeating at that finer level for the biggest positions.

It is a measurement tool, not a command. Small drift is normal, and chasing it too closely can cost more in fees and tax than it saves in risk.

The formula, in percentage points

• Current share: the asset class's present weight in the portfolio, as a decimal (0.55 is 55%).
• Target share: the weight you decided on for that class, as a decimal.

Drift is stated in percentage points because both inputs are already percentages of the same whole. Writing it as a percent change would give a different and confusing figure. A positive result means the class is overweight, and a negative one underweight.

Worked example: 55% held against a 45% target

1. 1Express the current weight as a decimal: 0.55.
2. 2Express the target weight: 0.45.
3. 3Subtract: 0.55 − 0.45 = 0.10.
4. 4Multiply by 100 to read in points: 10 percentage points.

The equity slice is therefore 10 points over target, and the rest of the portfolio is by definition 10 points below its combined target. In relative terms, 10 points on a 45% target is a 22% overweight (10 ÷ 45), which is why the same drift feels bigger for a small allocation.

Turning the drift into an amount to trade

Drift becomes concrete when multiplied by portfolio value. In a portfolio worth 1,000,000, a 10-point overweight means 100,000 sits above its target. Selling 100,000 of the overweight class and buying the underweight ones restores the plan.

Many investors do not need to sell at all. Directing new contributions, dividends and interest to the underweight class can close the gap gradually, with no trading cost or tax event.

Selling in a taxable account deserves a pause. A gain realised to restore a target weight is a real tax bill today in exchange for a risk reduction that might be achievable through new contributions in a few months. Where selling is unavoidable, trimming the most overweight holding first often delivers the largest change for the smallest realised gain.

Why the same move feels bigger at some weights

The table lifts the current share by 10% of itself, from 0.55 to 0.605.

A 10% relative increase in the holding adds 5.5 points of drift, taking it from 10 to 15.5. This is the mechanism of drift in practice: a class that is already large grows by more points for the same return, so an overweight tends to feed on itself. Understanding it helps you set a check interval, since a portfolio can slide a long way between annual reviews in a strong market.

Mistakes that undermine rebalancing

• Mixing points with percent change. A drift of 10 points is not 10% and not the same as a 22% relative overweight.
• Measuring at the wrong level. A single fund can drift while the asset class overall stays on target, so decide whether to track classes or individual holdings.
• Rebalancing on every wiggle. Acting on 1 or 2 points of drift can generate more cost than benefit.
• Ignoring tax and exit charges. Selling winners in a taxable account can create liabilities that outweigh the risk reduction.

Underweight classes are worth the same attention. A bond allocation that has slipped 10 points below target means the portfolio has less ballast than planned, and that matters most in a downturn, exactly when rebalancing feels least comfortable.

A repeatable review routine

1. 1List each asset class with its current value and divide by the total to get current weights.
2. 2Compare each weight with its target and compute the drift in points.
3. 3Flag any class outside your tolerance band.
4. 4Fix the largest gaps with new money first, then trades if needed.
5. 5Record the date and result so the next review starts from a clear baseline.

Done once or twice a year, this takes minutes and keeps your portfolio aligned with the plan you actually made.