Rebalance Your Investment Portfolio Periodically: Mantra or Myth?

Abstract

The investment mantra goes something like this: “have a well-diversified mix of stocks and bonds and rebalance it to maintain your strategic asset allocation.” Recent publications in the financial press have begun to question the value of periodic portfolio rebalancing. This research examines the equity portion of a well-diversified investment portfolio and shows that the “numbers” just don’t support the mantra. In fact, this research indicates that traditional rebalancing is the worst strategy, on a risk adjusted basis, for long-term portfolio growth when compared to three other strategies. While the mantra has intuitive appeal, it does not make financial sense. A very popular portfolio strategy is to execute rebalancing of the equity portfolio periodically, generally every 12 months – for example selling the overperformers. Recent research has noted investors utilizing this strategy may be depriving themselves of the gains that extend beyond one year (Clements 2005 and Constable 2021). Thus, limiting the equity portion of an investment portfolio to passive, low-cost S&P 500 Index fund and avoiding more costly rebalancing strategies in the longer term typically results in both greater reruns for the level of risk and lower fees than the cost of continuous rebalancing.