Time to Rebalance Portfolio

[Shagger56]

Is there a best time to rebalance your portfolio? I have read that mutual fund managers often buy and sell like crazy just before the end of a quarter in order to make themselves look good by having the "right" stocks and bonds in their portfolio. Also they may trade because of certain tax situations. Does this skew the results as far as rebalncing your portfolio?

On a related issue, how often should you rebalance? Once a year? Twice a year? Once a quarter?

Thanks for you advice.

 

[audreyh1]

No more than once a year. Actually 18 months may be more optimal particularly in a taxable account.

If you rebalance frequently, you lose a lot of the benefit of using asset allocation - you haven't given your asset classes enough time to diverge.

You can also use some % deviation from your base asset class to trigger a rebalance - say if your stock/bond allocation is off by more than 5% or something like that - just an example. That you will likely rebalance after a major correction or sudden advance. But otherwise it's beneficial to wait.

If you are worried about fund managers "goosing" their returns, this behavior usually shows up in the last 2 to 3 days of the month. It probably doesn't make that much difference in the long run. This tends to affect individual momentum stocks rather than the averages overall.

Audrey

 

[mickeyd]

I have read that mutual fund managers often buy and sell like crazy

Hello Shagger,

I agree that rebalancing more often than annually can be counter-productive and can take the wind out of the sails of any short rally within your portfolio. My suggestion is to forget about what MF managers do. 75% of them can not even figure out how to beat the benchmark that they are compared to!

Establish your own financial plan that reflects your needs and stay the course on that plan. Remember that MF managers have a much different goal than do you or even the investors in their specific fund. They strive to get short-term gains so that their marketing literature and advertising campaign can indicate that they were up "22.65% or so" for the quarter.

 

[Mach1]

You can also use some % deviation from your base asset class to trigger a rebalance

I like this idea.

Mach1

 

[mathjak107]

i read 2 years is optimal as most trends run longer than 1 year

 

[lazyday]

It's a tradeoff. Frequent rebalancing may reduce risk, but is more work, may be more cost, and may annoy your fund company(ies).

Also, as others have posted, some research says you make more money if you wait a few years between rebalancing, but I'm skeptical if that's true on a risk adjusted basis.

If it's free to rebalance, I'd think once a year is pretty good, if careful to minimize taxes. If already watching the portfolio often, then could instead rebalance when allocation has moved far enough from target. But avoid any short term taxable gains.