Over long stretches stocks outgrow bonds, so a portfolio you never touch keeps sliding toward stocks. When Vanguard ran a mix of 60% stocks and 40% bonds from 1926 through 2018 with no rebalancing, it averaged 85% stocks, and its yearly returns swung more widely than any rebalanced version’s.
The drifting portfolio also earned more, 8.74% a year after tax against 8.2% to 8.4% for the rebalanced versions, because it had turned into a stock portfolio. That’s the trade. Rebalancing gives up some upside to keep the risk you signed up for, and Vanguard names managing risk, not maximizing return, as the whole point.
How often you rebalance matters far less than doing it. In the same study, checking monthly and fixing any drift meant rebalancing 1,116 times over 92 years. Checking once a year and acting only when the mix was more than 10 percentage points off meant rebalancing 14 times. Both returned 8.20% a year.
Set it up this way:
- Pick a fixed date, such as the week you file your taxes, and compare each asset class with its target.
- Act when something has drifted 5 percentage points or more. Smaller gaps can wait for next year.
- Rebalance inside a 401(k) or IRA first. Trades there don’t trigger taxes.
- In a taxable account, send new contributions and dividends to whatever is lagging before you sell a winner.
A target-date fund or robo-advisor rebalances for you, so money held there can skip the routine.
Put the date on your calendar now. A rule set in advance keeps a rally or a selloff from making the call for you.
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