Say you want to hold 50% Bitcoin and 50% Ethereum. Bitcoin has a good month, and now you're sitting at 55/45. Do you rebalance? What about 51/49? What about 65/35?
The honest answer is: it depends on where you draw the line, and that line is called a tolerance band. It's one of the most consequential settings in any rebalancing strategy, and one of the least discussed, because "just rebalance when it drifts" sounds simple until you have to define "drifts."
What a tolerance band actually is
A tolerance band is the amount an asset is allowed to drift from its target weight before it counts as out of balance. If Bitcoin's target is 50% and its tolerance band is 5 percentage points, anything between 45% and 55% is considered on target. Cross either edge, and it's flagged for rebalancing.
Bands can be set per asset, not just portfolio-wide. A stable, lower-volatility position might warrant a tight band, while a more volatile one might need room to breathe so you're not trading it every time the market has an ordinary day.
The trade-off in both directions
Too tight, and you trade constantly. A 1-2% band on a volatile asset gets crossed often, sometimes within the same week. Every rebalance is a set of trades, and every trade has a cost, whether that's an explicit fee or the bid-ask spread. Tight bands can quietly erode returns through nothing but transaction costs, chasing noise instead of responding to a real shift in your portfolio's balance.
Too loose, and drift goes unmanaged. A 20% band on a core holding means your portfolio can swing a long way from the mix you actually chose before anything happens. At that point you're not really running a target-allocation strategy anymore, you're just holding whatever the market has turned your portfolio into, with an allocation target that exists on paper but not in practice.
The right band sits somewhere between those two failure modes, and where exactly depends on the asset, not a single number you apply everywhere.
A starting framework
There's no universal correct tolerance band, but a few factors reliably shift the right number:
Volatility. More volatile assets naturally drift further and faster. A band tuned for a large-cap, lower-volatility asset will get crossed far too often if applied unchanged to something more volatile, generating trades that aren't really telling you anything useful.
Correlation with the rest of your portfolio. If two assets tend to move together, drift in one is less likely to represent a real shift in your overall risk profile. Assets that move independently of the rest of your holdings are worth tighter bands, since their drift is more likely to be a meaningful, uncorrelated change rather than the whole market moving at once.
How much you care about precision versus cost. Someone optimizing to stay as close as possible to a target mix will run tighter bands and accept more frequent trading. Someone optimizing to minimize fees and trading activity will run looser bands and accept more drift between rebalances. Neither is wrong; they're different answers to a trade-off that has to be made one way or another.
A reasonable starting point. Common practice for less volatile, core positions is a band in the 5-10 percentage point range. For assets you expect to be more volatile, or that make up a smaller slice of the portfolio, a wider band, sometimes 15-20 points, keeps normal volatility from triggering trades that don't reflect any real change in your intended risk. Start conservative, watch how often each asset actually crosses its band, and adjust from there rather than guessing once and never revisiting it.
Why this matters more than picking the "right" target allocation
A lot of the conversation around portfolio construction focuses on the target weights themselves: how much Bitcoin, how much Ethereum, how much of anything else. That's a real decision, but tolerance bands are what actually determine your day-to-day behavior. Two people with the identical target allocation but very different bands will end up trading completely differently, holding different realized risk over time, and paying different amounts in fees, even though their stated strategy looks the same on paper.
Put differently: your target allocation is the plan. Your tolerance band is what turns that plan into actual, repeatable behavior instead of a number you glance at occasionally and mostly ignore.
Set once, or revisit it?
Tolerance bands aren't something you're locked into. As your portfolio composition changes, as you get more or less comfortable with volatility in a given asset, or as you simply learn how often a given band actually triggers a rebalance in practice, it's worth revisiting. What doesn't help is picking a band once, never checking whether it's producing sensible behavior, and assuming the strategy is running as intended.
How Rebalance handles this
Rebalance lets you set a tolerance band per asset, not just one number for the whole portfolio, so a volatile, smaller position can run looser than a core holding without any manual math on your end. When an asset drifts outside its band, that's surfaced immediately and a rebalance is one click away, previewed before anything trades. If you'd rather not check in manually, the same bands drive optional weekly or monthly scheduled automation, off by default, with a built-in ceiling that refuses to trade past a limit you set.
Either way, the band you choose, not a predefined index or someone else's model portfolio, is what decides when your portfolio actually gets touched.
See how tolerance bands fit into the rest of the setup on the pricing page, or start a 3-day free trial to set your own. A payment method is required to start, but you won't be charged until the trial ends, and you can cancel anytime.