Investing term
What is 5/25 rule?
Rebalance any sleeve that has drifted more than 5 percentage points absolute, or 25% relative, from its target weight.
The 5/25 rule is a tidy trigger for when to rebalance. You act when any holding drifts 5 percentage points in absolute terms from its target, OR 25% in relative terms — whichever happens first. The two thresholds cover both big and small positions: the absolute one catches your large sleeves, the relative one catches your small ones before they drift unnoticed.
The cleverness is in combining the two. A 5-percentage-point rule alone would be too loose for small positions — a 4% target could double to 8% before tripping a 5-point move — while a 25% relative rule alone would be too twitchy for large ones. Together, they trip whichever is more appropriate for each holding's size: a big 20% sleeve rebalances when it hits 25% (the 5-point absolute rule), while a small 4% sleeve rebalances at just 5% (the 25% relative rule, since 4% × 1.25 = 5%). It's a rebalancing rule scaled sensibly to position size.
The 5/25 rule rebalances a big sleeve when it drifts 5 points (a 20% target hits 25%) and a small sleeve when it drifts 25% relative (a 4% target hits 5%) — whichever trips first.
For example
A 20% target trips at 25% on the absolute rule (5 points), but a 4% target trips at just 5% on the relative rule (4% × 1.25) — long before it ever moves 5 whole points.
Learn it by doing
That's 5/25 rule in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 18, Rebalancing & Maintenance).
Try the free lesson →Why it matters to you
The 5/25 rule matters because it solves a real weakness of simpler rebalancing triggers: a single threshold can't fit both large and small positions. By applying an absolute band to big sleeves and a relative one to small sleeves, it rebalances each when it has genuinely drifted for its size — neither leaving small positions to run unnoticed nor churning large ones over trivial moves. It's a refined, size-aware rule that keeps a portfolio close to target with minimal fuss.
⚠ Using one threshold for every position
A single rebalancing threshold misfits positions of different sizes: a 5-percentage-point rule lets a small holding drift far in relative terms before tripping, while a 25% relative rule churns large holdings over minor moves. Applying one threshold to everything either neglects small positions or over-trades big ones. The 5/25 rule exists precisely to apply the right threshold to each holding's size.