In this article, we lay out two scenarios that require rebalancing and briefly recap the rules for each scenario. The rebalancing rule can be determined thus: Arrive at a threshold return, which is one percentage point plus the expected pre-tax return on equity investments. When the actual return is greater than the threshold return, rebalance to the extent of the actual return less the pre-tax expected return. The rule for rebalancing is different for the two scenarios. Note that the rebalancing rule for the second scenario already considers the tax liability by creating a threshold return.
