The gradual movement of actual portfolio weights away from their targets, caused purely by different assets producing different returns.
Drift is not a mistake; it is arithmetic. If one sleeve compounds faster than another, its share of the total rises without anyone trading. The problem is that drift always increases exposure to whatever has already run.
Example: start 50/50 with $50,000 in each of two assets. Over five years asset A compounds at 12% and asset B at 3%. A is worth $88,100 and B $57,900, so A is now 60.3% of the portfolio. The investor now carries materially more of A's risk than they signed up for.
Measuring drift is easy and worth doing monthly: for each holding, record target weight, actual weight, and the gap. A gap that keeps widening in the same direction is a sign the target itself may need review rather than more frequent trading.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
Educational only, not advice. Spotted an error? Post in Site Feedback.