Methodology
Rebalancing bands: the 5/25 rule and the quiet zone
A band’s main output is silence — and in a German taxable account, the cost of breaking that silence is part of the arithmetic.
Last updated: 6 October 2026 · By The Acutic Research Team
Rebalancing is usually explained as a way to make money — a disciplined method of taking gains and adding to laggards. That framing is popular and mostly wrong. The best case for it is duller and more durable: a portfolio left alone stops being the portfolio that was chosen.
What it is for
Vanguard’s Best practices for portfolio rebalancing puts the purpose plainly: the function is keeping a portfolio’s risk aligned with its target. As asset classes diverge, the mix drifts toward whatever has performed, and the resulting risk profile is an accident rather than a decision.
Notice what that does to the question. If the point is return, the right frequency is whatever historically paid best — a number that changes with every period studied. If the point is risk control, the right frequency is whatever keeps the mix recognisable, and that is answerable without predicting anything. This article stays on the second question, and deliberately quotes no figure for what rebalancing adds or costs: every published estimate is specific to the period, mix and tax treatment behind it.
Calendar or threshold
Two families of policy exist. Calendar policies look at the portfolio on a fixed schedule — annually, say — and act on whatever they find. Threshold policies define a tolerance around each target and act only when it is exceeded, whenever that happens to be.
The trade-off is not subtle. A calendar policy is trivial to follow and can act on a deviation too small to matter, or sit still through a large one that arrives a month after the review. A threshold policy responds to the thing that actually matters — the size of the deviation — at the cost of requiring the weights to be measured more often than once a year.
The 5/25 bands
The best-known threshold rule is Larry Swedroe’s 5/25, from Think, Act, and Invest Like Warren Buffett. An asset class is outside its band once it has moved by 5 percentage points absolute, or by 25 % of its own target weight — whichever of the two is the smaller trigger.
The second half is what makes it work across a portfolio containing both a 60 % core and a 5 % satellite. A flat 5-point band would let a 5 % position double before anything registered.
| Target weight | 25% of target | Band applied | Which rule binds | Quiet zone |
|---|---|---|---|---|
| 5% | 1.25 pp | 1.25 pp | relative | 3.75% – 6.25% |
| 10% | 2.5 pp | 2.5 pp | relative | 7.5% – 12.5% |
| 20% | 5 pp | 5 pp | both | 15% – 25% |
| 30% | 7.5 pp | 5 pp | absolute | 25% – 35% |
| 40% | 10 pp | 5 pp | absolute | 35% – 45% |
| 60% | 15 pp | 5 pp | absolute | 55% – 65% |
Computed as min(5 pp, 25% × target). The two rules coincide at a 20% target — above it the absolute rule gives the smaller band, below it the relative one does.
The crossover sits at 20 %, where the two tests give the same answer. Above it the absolute rule is tighter; below it the relative rule is. One rule, two regimes.
Most of the time, nothing has happened
A band’s real output is silence. Plotting a weight against its band makes the point better than describing it does.
2 breaches in 18 months. For the other 16, the policy’s answer is that the portfolio is still the portfolio that was chosen. That is the part worth internalising: a band is mostly a device for establishing that a move was ordinary — and a rule that produces an answer every month is not a band, it is a schedule.
Which also means a band is only as useful as the record of what the targets were. A weight of 35.4 % is neither high nor low in itself; it is 5.4 points above a target that was written down at some earlier point, by someone who had reasons. That is the same argument made in position sizing and in portfolio rules you actually keep.
The German complication
Most English-language writing on this topic assumes a tax-sheltered account, where a correction is free. In a German taxable Depot it is not. Disposing of a position to bring a weight back inside its band realises the gain, and the tax falls due whether or not the proceeds go straight back to work.
That is a real argument for wider bands rather than narrower ones, and it is arithmetic rather than preference: a correction has to be worth more than the tax it triggers. The mechanics are in the two loss pots and the Sparer-Pauschbetrag, and for fund positions specifically in the Vorabpauschale.
One consequence is worth stating because it is easy to miss: new contributions change weights without triggering anything. Directing them toward whatever sits low in its band moves the mix at no tax cost at all — a lever that exists only while a portfolio is still receiving money.
A band is a measurement problem
Everything above reduces to knowing two numbers per position: what it is now and what it was meant to be. Acutic computes the first continuously and compares it against the second where a target has been recorded, presenting the gap as a factual observation — the weight, the target, the difference, and whether a stated band contains it. No view about what should follow; how the analysis is produced is on the methodology page, and the workspace under product.
Frequently asked questions
What is rebalancing actually for?
Keeping a portfolio’s risk where it was set, not raising its return. Vanguard’s "Best practices for portfolio rebalancing" makes this the central point: as asset classes diverge, the mix drifts toward whatever has performed, and the portfolio ends up carrying risk nobody chose. Any return effect is a by-product and varies with the period, the mix and the tax treatment.
What is the 5/25 rule?
A banding rule set out by Larry Swedroe in "Think, Act, and Invest Like Warren Buffett". An asset class is outside its band when it has moved by 5 percentage points absolute, or by 25 percent of its own target weight — whichever of the two is the smaller trigger. For a 30% target that is 5 points; for a 5% target it is 1.25 points.
Why does the trigger change at a 20% target?
Because that is where the two tests cross. 25 percent of a 20 percent target is exactly 5 percentage points, so above 20% the absolute test is the tighter of the two and below it the relative test is. The rule is a single "whichever is smaller", but it looks like two different rules either side of that point.
Do bands mean acting more often or less?
Usually less. A band is a tolerance, and the majority of observations fall inside it — in the illustration on this page, sixteen months out of eighteen. The purpose of a band is to separate ordinary movement from movement large enough to matter, which means most of the time it is telling you that nothing has changed.
What does German tax do to this?
It puts a cost on every correction. Disposing of a fund or share position inside a German taxable account realises the gain, and the tax is due whether or not the proceeds are immediately reinvested. That cost is one of the reasons a wider band can be a reasonable policy. The mechanics are covered in the Vorabpauschale and loss-offsetting articles.
Further reading: portfolio concentration risk, how often to check a portfolio and how to benchmark a portfolio. Create free account.
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