Rebalancing is a personal choice, not a choice that statistics can validate.
—Vanguard founder Jack Bogle
Rebalancing is one of the most common bits of investment advice you’ll ever hear. Plug the term into a web browser, and literally thousands of articles, videos and podcasts will appear instantaneously.
The advice is pretty basic. Pick a split between stocks and bonds that matches your tolerance for risk and desire for returns, and periodically trade your portfolio back to those levels. Heck, part of the reason I traded the IVA Portfolios last week was to rebalance—selling stocks to buy bonds (and cash) to return the IVA Portfolios to their long-term target allocations and risk levels.
Given my most recent trades, you might be surprised to hear that I’m skeptical about rebalancing. In fact, I think many practitioners take the practice too far while overselling its benefits.
So, let me use Balanced Index (VBIAX) to show you why you don’t need to rebalance your portfolio constantly, and why it’s all about managing risk—not boosting returns!
Balanced Index, which effectively invests 60% of its assets in Total Stock Market Index (VTSAX) and 40% in Total Bond Market Index (VBTLX), is the “ultimate” rebalancing vehicle. Vanguard’s managers use the cash that flows in and out of the fund every day to keep the portfolio as close as possible to that 60/40 stock/bond mix.
An individual investor would be (very) hard-pressed to rebalance daily on their own—the trading would be a Sisyphean task. But it’s not a task we need to shoulder. All that daily rebalancing may meet Vanguard’s objectives for Balanced Index, but it doesn’t improve returns.
To test my theory that too much rebalancing is counterproductive, I built several portfolios combining Total Stock Market Index and Total Bond Market Index in 60/40 mixes that followed different rebalancing schemes: One rebalanced monthly, another annually. I let my third portfolio run without rebalancing. I took the analysis back to Balanced Index’s launch in 1992.
The results are in the table below, showing both returns and drawdowns during some of the markets’ most challenging environments.