What best describes calendar rebalancing?

Calendar rebalancing refers specifically to the practice of adjusting the portfolio back to its target allocation at predetermined time intervals, such as monthly, quarterly, or annually, regardless of the asset performance or market conditions. This strategy is designed to maintain the intended risk level and asset mix of the portfolio over time.

The choice of rebalancing at periodic intervals ensures that the portfolio does not drift too far from its strategic asset allocation due to changes in market values. This method simplifies the rebalancing process, as investors can establish a routine schedule for reviewing and adjusting their holdings, which can help instill discipline in their investment approach.

The other options describe different rebalancing strategies or considerations. For example, rebalancing based on performance metrics focuses on adjusting the portfolio according to how individual assets have performed relative to targets or benchmarks, rather than strictly adhering to a calendar timeline. Rebalancing according to market trends would involve adjusting allocations in response to broader market movements or predictions, and rebalancing to adjust for inflation changes would involve strategically shifting assets to cope with erosion of purchasing power. However, none of these methods embody the essence of calendar rebalancing, which emphasizes a systematic, time-based approach.