Should You Rebalance Your Portfolio?

By Colleen M. Jaconetti, Yan Zilbering, Francis M. Kinniry

The decisions you make about asset allocation will have more impact on your portfolio’s risk and return than your individual security selections. However, over time your portfolio will tend to drift from its target asset allocation and acquire risk-return characteristics that may be at odds with your goals and preferences. Therefore, it’s important to periodically rebalance. What’s involved in rebalancing?

In the article “Best Practices for Portfolio Rebalancing,” Colleen M. Jaconetti, Yan Zilbering and Francis M. Kinniry of Vanguard tackle the issues of how frequently you should monitor your portfolio, how far your asset allocation can deviate from its target before it should be rebalanced and whether periodic rebalancing should restore a portfolio to its target or to a close approximation of that target. They tested three possible triggers to determine when to rebalance:

• A “time-only” strategy
• A “threshold-only” strategy
• A “time-and-threshold” strategy

Find out what their results were and how you can use their research to set up your own rebalancing plan. 

By Charles Rotblut, CFA

Since 2011, AAII Journal editor Charles Rotblut has been conducting ongoing analysis of hypothetical portfolios to see the effects of rebalancing on two portfolios—one that has annual withdrawals and one that does not. He set up moderate 70% stock/30% bond asset allocation models made up of Vanguard mutual funds. In the article “Rebalancing Update: The Market’s Volatility Eliminated the Need to Adjust Allocations,” Rotblut updates the portfolios with 2018 performance data. Though last year was tough for investors to endure, it did provide good testing grounds to see how the models held up. Rotblut’s takeaways include:

• Periodic rebalancing cushioned the blow of 2018’s volatility.
• Diversification didn’t fail investors last year, but its benefits are more noticeable over longer time periods.
• The impact of bailing out of stocks at the end of 2008 continues to have a lasting impact, even for an investor who got back in right at the start of 2010.

Read the details on how Rotblut tracks his model portfolios and more insights he’s gained from the effect of 2018 on a rebalancing strategy.