Portfolio Monitoring and Rebalancing Strategies

John is a portfolio manager for a wealth management firm and oversees a diversified portfolio for a high-net-worth client. After monitoring the portfolio's performance for the last quarter, he notices that the allocations to various asset classes have drifted significantly from the original targets due to varying market performances. For example, equity exposure has increased beyond the target allocation while fixed-income investments have decreased.

As part of the portfolio monitoring process, John reviews both the portfolio’s performance and its risk profile. He considers both passive and active rebalancing strategies, weighing the potential benefits and costs associated with each approach. With the recent market volatility, he also contemplates the tax implications of reallocating assets.

Discuss the importance of effective portfolio monitoring in the context of asset allocation and trading. In your answer, address how John can implement a rebalancing strategy, taking into account investment objectives, market conditions, and the potential impacts of trading costs and taxes.