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How Often Should I Rebalance My Investment Portfolio?

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After writing this morning’s Betterment review and reading about their rebalancing feature, I started thinking about rebalancing. Betterment rebalances your portfolio after each quarter and if your actuals deviate from your allocation by more than 5%. In other words, they rebalance on a schedule and when the deviation exceeds a certain level (5%). When you read about rebalancing and when you should do it, many places often just point to a calendar date – rebalance every quarter, every six months, or once a year.

What is Rebalancing?

Rebalancing is the act of adjusting your actual investment allocation so that it meets you desired investment allocation. If you want to be 80% stocks and 20% bonds, you need to rebalance your investments periodically since both will likely perform differently over time. How often and when you rebalance is a matter of debate but as is the case with any type of investing (or gambling), it’s about the odds, your plan, and sticking with the plan as long as it’s worth sticking to!

Why should you rebalance? It’s all about the plan and mitigating your risk versus your reward. If you want to be aggressive and go 90% stocks, 10% bonds, you want to make sure your portfolio reflects that plan. As investments perform differently, you adjust your portfolio to reflect your desires.

Rebalancing also has the added benefit of taking the emotion out of investing. It’s hard to sell an asset if it’s lost value (or hasn’t gained nearly as much as others) for emotional reasons. With rebalancing, you take that out of the equation. If you want 80/20, you rebalance to 80/20. You buy more of what’s lower and sell more of what’s higher.

How Often Should You Rebalance?

This is an age-old debate that really has no correct answer and is really up to your situation. Here are a few considerations:

  • Commissions and fees: Depending on which broker you use, rebalancing may cost you in terms of commissions and other trading fees.
  • Active trading clauses: For example, Vanguard lets you buy and sell it’s mutual funds for free, which is great for rebalancing, but has active trading clauses that will block out out of a fund. If you sell shares of those mutual funds, you can’t buy back in for a period of time (to prevent active trading).
  • Capital gains taxes: If you’re rebalancing a 401k or an IRA, taxes won’t be an issue. If it’s a taxable brokerage account, then you will be subject to taxes.

I personally think that, at most, you should rebalance once a quarter. To rebalance monthly seems a little extreme, especially when you consider fees and taxes. You should, however, rebalance at least every year, if not every six months. That’s a long enough period of time that you can avoid most active trading clauses.

How often do you rebalance?

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10 Responses to “How Often Should I Rebalance My Investment Portfolio?”

  1. DIY Investor says:

    Most of my clients use a discount broker that has free portfolio management software that tells you exactly how the portfolio is positioned relative to the model portfolio making it easy to stay on track. I use the 5% rule and suggest making it part of the investment policy statement because it is not easy for a lot of people to rebalance from the sector that has done well to that sector that hasn’t.
    It makes it easy also to invest the cash on a timely basis.
    No commission ETFs, such as Schwab offers, makes this easy – no commissions, trading restrictions makes it easy.

  2. billsnider says:

    I don’t like the percentage rule since it makes you react to short term, sharp swings. As we have seen in the last 10-15 years, most times there is a sharp swing back the other way. It is like a roller coaster. It gets emotional. I do believe in doing it at least once per year. At most twice. It takes the emotion out of doing it.

    Bill Snider

    • govenar says:

      If you know there’s always going to be a swing back the other way, I’d think that’s actually an argument for rebalancing more often; sell after it goes up 5%, buy when it goes back down 5%, sell when it goes back up 5%, etc. But I think it’s obvious that it’s not going to always swing back the other way immediately.

  3. cubiclegeoff says:

    I do it around once a year, sometimes in less time if I think about it. I know a lot of places will automatically rebalance at a certain time (like every year on your birthday).

  4. zapeta says:

    I rebalance yearly. I use the Morningstar X-Ray tool (http://portfolio.morningstar.com/RtPort/Free/InstantXRayDEntry.aspx) to see where my overall portfolio is, and adjust accordingly.

  5. Rob says:

    See page 6 figure 5:

    https://advisors.vanguard.com/iam/pdf/ICRPR.pdf?cbdForceDomain=false

    A 60/40 portfolio (stock/bond) that never rebalanced outperformed 9.1 % to 8.5 % 1926-2009.

  6. Rob Bennett says:

    I think that investors should consider making adjustments to their stock allocation once per year but that they should never rebalance. Rebalancing is selling or buying to get your stock allocation back to where it was before? Huh? Stock valuations change over time. Stocks are obviously much more risky when valuations are high. So, if valuations have risen, you need to lower your stock allocation, not bring it back to where it was before.

    It’s often not necessary to make changes. Small valuation shifts are insignificant for practical purposes and valuations can remain in the same general area for long periods of time. So it is entirely possibly that you could go eight or ten years without making an allocation change. But I think it makes sense to check in once per year or so to see where things stand.

    Rob

  7. I redirect new contribution to 401k as needed. This will help bring the balance back to target and if the balance is still out of whack I rebalance around the end of the year.

  8. mfdiva says:

    I have been rebalancing quarterly as we are in a difficult period. Fees can usually be avoided if you do not trade within the 90 day holding period most mutual funds require. If you are using ETF’s, you have brokerage commissions,but also the ability to prevent significant loss by using a stop loss on the fund, since it trades like a stock. Make sure you factor in the commission costs when evaluating your ETF yield performance.

  9. Son-of-Butch says:

    I rebalance twice a year.
    Once each year after the last moon change in April, but before the 1st moon change in May.

    Then again after the last moon change in October, but before the next moon change in
    November.

    Why?
    If you know, then I don’t have to explain it to you.
    [I learned it in my youth growing up on a farm from older experienced farmers marketing grain and cattle well over 40-50 years ago]

    If you don’t understand why, my explaining it won’t change your mind.
    But if you run a market history for the last 100 years and study it for yourself, you will see market cycles and keys in timing events.
    With 6 month periods showing the greatest average advantage.

    Telling does nothing. [In 1 ear out the other]
    Pointing to the direction and then allowing for self discovery may be slower, but it creates real learning.


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