You're cutting off momentum, which tends to take more than the one year rebalance cycle to turn.
Now, if you only rebalance when one asset class is clearly overvalued and send the money into a clearly undervalued asset class, you might have something. If you could figure out that whole over/under valued thing.
I think I saw some study that said if you rebalanced every 2-3 years you'd have better results than doing it annually. Annual rebalancing actually dampened returns.
This is basically the same problematic mechanism people who hold individual stocks encounter when they 'sell the winners'. You lose all that momentum and end up with a portfolio of losers.
Of course, if you rebalanced your fat stock portfolio into bonds at the end of 1999 you became a very happy camper.
Smart Money magazine did an article on this years ago (1998? 1999? it was before the tech crash). It stated the same thing- you need to let winners ride. Then set a higher percentage as the rebalance trigger (5% too low, think 10% or 15%. If you see 20% gains, it is OK to sell some of them type thinking).
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The way I do it is this:
1) I rebalance twice a year
a) I contribute to 401k 2X month
b) I contribute to my Roth Jan-August @$625/mo
c) wife's Roth is a sector portfolio
2) the first rebalance is in June. I do two things
a)sell 1% of all holdings into bonds (this is a gradual move from 100% equities to 90/10 or 80/20 over a 5 year period). I only sell if I am at a profit of more than 1% since January (for example sold in June of 2007 but did not sell in June of 2008)
b) adjust deposit amounts so the lowest performing assets of the year get most of the deposits. I might adjust my Roth deposits more month-month if I see things happening sooner (June-July-Aug is not a large enough deposit to rebalance)
3) the second rebalance is the last day of the year (Dec 29-30-31). I buy/sell for move in line with target allocations and also bump the bond percentage of contributions up 1% from previous year.
**Because I adjust contributions in June, I have only had to actually sell securities ONCE in 3 years following this practice.**
My 1% move every 6 months to bonds does complicate this some- but I understand it.
4) wife's sector allocation in her Roth is more of a weighting strategy- we have 7 sectors we buy each month for 12 months. Once sector is always overweighted (right now it is financials). Generally accumulating the sector which is getting hit hard at that time and maintaining positions in the others.
I'll let you know how this turns out- we just started doing the sector strategy in July.