Year-End Portfolio Rebalancing Check-In Time

Although you can rebalance the stocks and bonds in your portfolio back towards your target asset allocation at any time, I usually see more articles about it at years-end. This works out well as the evidence doesn’t really support doing it more often than once a year. Morningstar has a couple of interesting rebalancing articles where the overall conclusions are the similar to those from the previously-mentioned Vanguard research, but with some added context.

• You Probably Need to Rebalance
• Why Rebalancing (Almost Always) Pays Off

Rebalancing is about risk control, not necessarily increasing returns. Sometimes rebalancing will increase returns, and sometimes buy-and-hold (not rebalancing) will lead to bigger returns. In the long run, you’d expect buy-and-hold to win as you allow the stocks to keep growing, but you might be surprised when comparing these trailing 15, 20, and 25 year timeframes ending May 2020.

Most common rebalancing strategies all work similarly. This means there is no need to do it more often annually. There is no single rebalancing rule that always results in the highest returns on all portfolios and over every timeframe. Therefore, why not pick an easy one that works for you, such as rebalancing once every year on the same date or using +/- 5% bands that may only get triggered once every 2 years on average.

I’ll end with a good conclusion sentence from the Vanguard paper:

Once you construct the appropriate allocation for your goals, remove yourself from difficult decisions by implementing an easy-to-follow, consistent rebalancing rule. […] We find that, over the long term, no one rebalancing strategy is dominant. Selecting and sticking with a reasonable rebalancing approach is better than not rebalancing at all.