In my previous post, I looked at the reasons why investors should occasionally rebalance their portfolios. When a portfolio contains both fixed-income and equities, rebalancing is mostly about risk management: if it also results in higher returns, that’s a secondary benefit. Having a disciplined rebalancing schedule also helps you control your behaviour and resist the pressure to chase performance.
That’s the theory behind rebalancing. But it doesn’t answer the most common question: “How often should I do it?” Like so many aspects of investing, the answer depends a lot on your situation. There are at least three strategies to consider.
1. Rebalancing by the calendar
Perhaps the most common rebalancing strategy is to make adjustments once a year. There’s nothing magical about that one-year interval. Indeed, many academic studies have tried to determine the optimal rebalancing period — monthly, quarterly, semi-annually, annually or even every two years — but the research is inconclusive. Since there’s no clear benefit to rebalancing more frequently, once a year should be fine for most investors.
If you’re using a tax-sheltered account, it doesn’t really matter which date you choose, but there are some practical reasons for rebalancing early in the year.