Rebalancing your portfolio won’t make you richer. Do it anyway
Rebalancing your portfolio of shares and bonds won't make you richer. Over the long run it usually costs a little return. Its real value is that it forces you to sell what has soared and buy what has crashed, the opposite of what instinct tells you, and that matters most when markets are falling hardest.
Vanguard's researchers tested a simple US portfolio, 60 per cent in shares and 40 per cent in bonds, going back to 1926. Checked once a year and rebalanced whenever the mix had drifted five percentage points, it would have told its owner to buy more shares just seven times. Every one of those instructions came after a bad year for shares, and most after a terrible one. The last came at the end of 2008, when US shares had just fallen 37 per cent.
Think about what that meant at the time. Banks had failed, the headlines were grim and most investors' instinct was to get out. The rule said get in. That is the real case for rebalancing your portfolio, and it has very little to do with returns.
Rebalancing your portfolio doesn't make you richer
Rebalancing sounds as if it ought to make money. Selling high and buying low should pay. Between shares and bonds, it mostly doesn't.
In the same study, Colleen Jaconetti, Francis Kinniry and Yan Zilbering compared a US 60/40 portfolio rebalanced at different intervals with one left alone, from 1926 to 2009. The untouched portfolio earned the most. But it was also the riskiest: its volatility (how widely returns swing) was the highest of the four, and it ended the period with 98 per cent in shares. It earned more because it had stopped being a 60/40 portfolio.
US 60/40 portfolio, 1926–2009 | Average in shares (%) | Return a year (%) | Volatility (%) | Rebalances |
Rebalanced monthly | 60.1 | 8.5 | 12.1 | 1,008 |
Rebalanced quarterly | 60.2 | 8.6 | 12.2 | 335 |
Rebalanced annually | 60.5 | 8.6 | 11.9 | 83 |
Never rebalanced | 84.1 | 9.1 | 14.4 | 0 |
Source: Jaconetti, Kinniry and Zilbering, Best Practices for Portfolio Rebalancing, Vanguard (2010), Figure 6. US data, nominal returns in dollars, no costs or taxes.
The reason the untouched portfolio earned more is straightforward. Shares have higher expected returns than bonds, so every time you trim them back, you trim your expected return. Independent research points the same way. Matthias Horn and Andreas Oehler simulated rebalancing on the real portfolios of German households and concluded that those households would not have benefited from an automated rebalancing service.
Rebalancing within shares, between markets or styles with similar expected returns, is a different question. Jean-Michel Maeso and Lionel Martellini found a rebalancing premium among S&P 500 stocks. Between shares and bonds, though, anyone who rebalances hoping to beat a portfolio left alone is likely to be disappointed. Higher returns aren't what rebalancing is for.
What drift does to your risk
More recent Vanguard work shows the same thing. A portfolio that began as 60/40 in the early 2000s, split between US and international shares and US bonds, and was never rebalanced, had drifted to about 80 per cent in shares by the early 2020s.
Here is how that happens. Take £100,000, split £60,000 in shares and £40,000 in bonds. Say shares double and bonds stay flat. The portfolio is now worth £160,000, and 75 per cent of it is in shares. Then shares fall 40 per cent. The drifted portfolio loses 30 per cent of its value. Had it been rebalanced to 60/40 before the fall, it would have lost 24 per cent.
An investor who chose 60 per cent in shares because that was as much risk as they could stomach has ended up with 75 per cent without deciding anything. Without rebalancing, the market chooses your portfolio, not you. And it makes that portfolio riskiest just after the best of times.
Why we don't do it on our own
If rebalancing simply meant keeping a spreadsheet tidy, everyone would do it. The difficulty is that it asks you to act against your instincts as an investor.
Those instincts run the wrong way. Investors pile into what has risen and abandon what has fallen. Whatever has done well lately feels as if it will keep doing well, and whatever has done badly feels broken. Rebalancing demands the reverse. It makes you sell some of the asset you feel best about and buy more of the one you feel worst about.
Vanguard's researchers note that investors resist it in both directions. After a crash, buying more shares feels reckless. In a long bull market, selling the winners feels foolish, and a voice says that this time is different. Neither feeling is unreasonable in the moment. Both lead to the same place: a portfolio you never chose.
The household evidence bears this out. Laurent Calvet, John Campbell and Paolo Sodini studied the finances of Swedish households between 1999 and 2002, a period that included the dotcom crash. Households did respond when their portfolios drifted, but on average they corrected only about half of it. The rest they left to the market.
That is the gap a rule fills. A rebalancing rule turns a decision you would otherwise make in fear or greed into one you made in advance, when you were calm. It doesn't guarantee that you will follow it. But it changes the question you face in a crisis. 'Should I buy shares now?' is a question almost nobody can answer with confidence. 'Has my mix moved outside the band I set?' is one anyone can answer in a minute.
The real test is a bear market
Bear markets are where a rule earns its keep, because that is when instinct is strongest and most likely to be wrong.
At the end of 2008, rebalancing a 60/40 portfolio meant selling bonds to buy shares that had just lost more than a third of their value, with the news at its worst. Shares had fallen, so the portfolio was underweight in the asset that had just hurt you, and the rule said buy more of it. Very few investors will do that by choice. A rule does it anyway.
I've been an evidence-based investor since 2011, and I've been through several sharp falls since then: the eurozone debt crisis of 2011, the sell-off at the end of 2018, the Covid crash of 2020, the long decline of 2022 and the tariff shock of 2025. None of them fazed me in the slightest. I didn't have to make a single decision. The rules I'd set did the buying for me.
What followed past rebalancing points suggests why it can pay. After the 1974 point, US shares returned 15.1 per cent a year over the next 20 years, against 9.9 per cent for bonds. (These are US figures, before inflation.)
Now the cost, because there is one. Rebalancing can mean buying into a fall that keeps going. An investor who rebalanced into shares at the end of 1930 then watched US shares fall another 43 per cent in 1931. Strategies that keep restoring a fixed mix do worse than simply holding on in long, one-way falls, as André Perold and William Sharpe showed in 1988. Yet US shares returned 11.7 per cent a year over the 20 years from the end of 1931.
So the pay-off is long term, never immediate, and it arrives only if you stick with the rule through the part where it hurts. That is exactly the part most investors can't manage on their own.
How often should you rebalance your portfolio?
Less often than you might think. Vanguard found no optimal frequency. As the table shows, rebalancing every month meant 12 times as many rebalances as doing it once a year, for near-identical results. Checking once a year but acting only when the mix had drifted five percentage points cut the number to just 28 over 84 years. Each rebalance costs something: dealing charges and, outside a tax wrapper, possibly tax. Vanguard concluded that checking once or twice a year, with bands of about five percentage points, strikes a sensible balance between controlling risk and keeping costs down.
Some independent studies, including one by Hubert Dichtl and colleagues that uses UK data, find frequency matters more than Vanguard did, so the evidence is mixed. What matters most is choosing a rule you will actually follow.
Use cash flows first. Vanguard found that simply directing dividends and interest to whichever asset was underweight delivered most of the risk control with no trading at all, though it cautioned that the high yields of that 84-year period may not recur. New contributions and withdrawals can do the same job. Inside an ISA or a SIPP, switching between holdings triggers no capital gains tax.
Or let a fund do it for you. Multi-asset funds rebalance automatically, and Vanguard's LifeStrategy funds do it daily. But no fund can stop you selling the whole thing in a panic.
A rule you set when you're calm
Judge rebalancing not by whether it beat doing nothing, but by whether it kept your risk where you chose it and stopped you doing the wrong thing at the worst moment. On that test it does its job.
My own portfolio is split between Vanguard LifeStrategy, which rebalances daily, and a diversified portfolio of factor-based funds that rebalances automatically whenever allocations move outside set bands. Neither needs anything from me, or any attention.
None of this reflects discipline on my part. I have arranged things so that discipline isn't required. The best rebalancing decision is the one you never have to make.
If you found this interesting, the TEBI YouTube channel has a playlist of short videos on exactly this: Why do we make bad investment decisions?
Resources
Calvet, L. E., Campbell, J. Y., & Sodini, P. (2009). Fight or flight? Portfolio rebalancing by individual investors. The Quarterly Journal of Economics, 124(1), 301–348.
Dichtl, H., Drobetz, W., & Wambach, M. (2016). Testing rebalancing strategies for stock-bond portfolios across different asset allocations. Applied Economics, 48(9), 772–788.
Horn, M., & Oehler, A. (2020). Automated portfolio rebalancing: Automatic erosion of investment performance? Journal of Asset Management, 21(6), 489–505.
Jaconetti, C. M., Kinniry, F. M., Jr., & Zilbering, Y. (2010). Best practices for portfolio rebalancing. Vanguard Research.
Maeso, J.-M., & Martellini, L. (2020). Measuring portfolio rebalancing benefits in equity markets. The Journal of Portfolio Management, 46(4).
Perold, A. F., & Sharpe, W. F. (1988). Dynamic strategies for asset allocation. Financial Analysts Journal, 44(1), 16–27.
Vanguard UK. (2026). Why, how and when multi-asset investors should rebalance. Vanguard Asset Management.
Putting the rules in place
Deciding in advance how you will hold, add to and rebalance a portfolio is one part of a larger plan. Building that plan is what How to Fund the Life You Want, by TEBI editor Robin Powell and Jonathan Hollow, sets out. The second edition, published by Bloomsbury, is written for UK readers. Buy it on Amazon.
Readers who would rather hand the rule to a professional can start with TEBI's Find an Adviser directory, which lists advisers who have publicly committed to evidence-based investing.
