The Great Rebalancing Debate

Comments on “When to Rebalance a Portfolio,” by Charles Rotblut, CFA, in the January 2022 AAII Journal:

Rebalancing in taxable accounts can have adverse tax consequences, but taxable accounts are not the only account type and there are ways of rebalancing (e.g., steering new contributions) without tax consequences. Overall, rebalancing is a no-brainer, as the scoreboard clearly shows.
—Rainer F. from Massachusetts

What I would like to see as a part of this article is a chart showing the year-end value for the balanced versus unbalanced portfolios. AAII’s own authors have stated that risk has to do with the risk that you will need to withdraw funds when the volatility has the portfolio value down. This is a much better definition than the simplistic “all volatility is bad risk” assumption implicit in this article.
—Steven P. from Oregon

I would prefer to see a rebalancing conversation as it relates to economic cycles. Shifts in sectors and industries. Where to be over- or underweight. As the economy moves through its growth and retraction cycles there are so many opinions as to when these shifts occur. Should you be a month or two ahead of where you think that cycle changes? Because when the market does shift, it happens like an earthquake versus a slow erosion.
—Wayne S. from Massachusetts

Let’s not forget that investors have differing risk tolerances. There would have been many who would have been kicking themselves for not rebalancing in 2008 or 2009 when stock prices went down more than 30% and bond prices increased over 25%. In my opinion the “conventional wisdom” of rebalancing may be appropriate for those who are risk-averse or have a conservative strategy.
—Margaret G. from Missouri

In my opinion, formed based on some data analysis, “regular time-based” rebalancing doesn’t improve overall investment returns (though it does in many cases reduce volatility). It’s important to note that Rotblut doesn’t make the claim that rebalancing is better for returns. I believe he was trying to make the point that if your starting allocation is still appropriate for your circumstances, then you should consider rebalancing as time goes on.

Importantly, the article provides some practical ideas for rebalancing (when adding to or withdrawing from a portfolio, for example). To me, the critical point in rebalancing is to do it when I’m essentially “buying low and selling high.” There is no specific time period or threshold that makes achieving better returns through rebalancing easy (though arguably thresholds are perhaps somewhat more helpful). Rather, good judgment, clarity on your investment objectives and the willingness to remain open to new information and to act accordingly is how to make rebalancing work best for you.
—Lance Y. from Nevada