Another Take on Rebalancing

[jldavid47]

This take on rebalancing is both interesting and comprehensive. David Bahnsen gives an overview of how his firm rebalances his clients accounts and why. It's worth a read even if you like treating this subject in a more simple way.

Rebalancing: Because Something Always Underperforms - January 30, 2026

Learn why portfolio rebalancing matters in investing. It is key to managing risk and achieving your financial goals.

thebahnsengroup.com

 

[Dtail]

Nothing new to me, but interesting nonetheless.
It does make a decent logical point that if one wants Security A to be 20% of the portfolio as part of one's risk AA, then large gains cause it to be 30% of the portfolio currently, why shouldn't one rebalance? Otherwise why wouldn't one have used 30% of the portfolio to be Security A, when the parameters of the AA was first derived? What has changed and what assurances in the future would cause the thinking to change to 30%?
Of course, as one ages and their risk acceptance level might change, there can be a valid reason to change the AA.

 

[braumeister]

Why do I get the sense that this article could have been titled "How we justify churning your accounts"?

one security is re-sized relative to another (for example, a stock that had gone from 2.5% of the portfolio to 2.2% is bought back up to 2.5% while a security that had gone from 2.5% of the portfolio to 2.8% is trimmed back down to 2.5%). In all, our ~$9 billion business executed $1.2 billion of trades over a six-trading-day period

 

[Stormy Kromer]

Why do I get the sense that this article could have been titled "How we justify churning your accounts"?

Oh, that is great.

 

[target2019]

I prefer the simpler way. Our assets are spread out 2-3 funds per account. There's sufficient flexibility for rebalancing.

 

[engineernerd]

A pretty long article, I only skimmed it, but it explains the usual main argument for regular rebalancing fairly well.

FIRECalc assumes you rebalance once a year, but in FI Calc you can explore the effect of rebalancing on different schedules (including never rebalancing).

I played with it at one point and rebalancing once a year gave better odds of success than never rebalancing. Sad but true for the super-lazy among us....

 

[Ben]

I've always been interested in this topic OP...thank you for sharing. I'm in the "not quite retired, but lean FI" category at the moment, so I'm still technically in the accumulation phase of my retirement planning arc.

At some point, I read Edleson's book "Value Averaging." Prior to that, I was solidly in the DCA camp, since that's the industry default, but the idea of VA seemed attractive to me. The main criticism of VA is that market "mean reversion" eats VA's edge over DCA, and I believe this is still the main source of controversy (someone here who is better educated on the subject may have a more informed perspective).

Based on that, for several years, I tried implementing a blended DCA/VA approach (sometimes called "SmartDCA") where I still invested a fixed monthly amount, but instead of peanut-butter spreading my monthly contribution across assets equally with the intent to rebalance down the road, I'd just invest more heavily in underperforming assets to bring my AA as close to my targets as possible with my fixed contribution.

I don't recall (and can't quickly locate) if any source that has studied this method, but maybe others on the forum can help fill in the gaps. Advantages to this approach over either VA or DCA seem to be:

1) No large cash reserves sitting on the sidelines fo VA, subject to the opportunity cost of market growth
2) No rebalancing in the traditional sense (selling winners to buy more losers).

But the effect of rebalancing is somewhat achieved through the process of investing more heavily in the underperformers each month.

I'll wrap up this post with some perspective. I feel extremely blessed to be having this discussion at all. That is, I have assets enough to be on the cusp of FI, and feel VERY fortunate for that, as I'm sure many on this forum would agree. So I'll keep chasing optimal strategy just as you and others, but I'm fairly certain that we all know what a luxury it is to be in a position to be chasing optimal returns vs living hand to mouth .

I'm reminded of a line in the (underrated) movie "Joe vs The Volcano" in which Lloyd Bridges says to Joe: "D**ned if I know, kemosabe. All I know is that when you're making those kind of calls, you're in the high country."

 

[big-papa]

A 3 part article worth reading: "The elusive rebalancing bonus"

https://www.bogleheads.org/blog/2020/08/08/the-elusive-rebalancing-bonus-part-1/

https://www.bogleheads.org/blog/2020/08/08/the-elusive-rebalancing-bonus-part-2/

https://www.bogleheads.org/blog/2020/08/08/the-elusive-rebalancing-bonus-part-3/

Cheers.

 

[COcheesehead]

I have looked at rebalancing not as a performance enhancer, but as a way of keeping your personal risk tolerance in check.

 

[big-papa]

I have looked at rebalancing not as a performance enhancer, but as a way of keeping your personal risk tolerance in check.

Back during my accumulation years, I did likewise. In this case the "free lunch" that is so often mentioned on the internet is more about not having too much rice to go along with your beans - or vice versa.

Cheers.

 

[sengsational]

I like to sell high and buy low. That's enough for me. And I know if I didn't do that fiddling, I'd probably find ways to make really bad moves. But if I give myself this bit of hands-on, my need to "do something" is satisfied.

 

[engineernerd]

^^^ I'd love to sell high and buy low, but found it impossible. Except buying low during market crashes, but those don't come along that often.

 

[Early_Runner]

Rebalancing is essentially selling high and buying low. What's not to like with that?

 

[COcheesehead]

It could also be looked at as cutting the flowers and buying the weeds.

 

[easysurfer]

For me, I only rebalance once a year. No need to stir the soup anymore.

 

[Onda]

100% in equities and almost never selling anything.
That left me with some massive losses but even more massive wins.

 

[sengsational]

Rebalancing is essentially selling high and buying low. What's not to like with that?

It's not so fun when everything goes down and I get a rebalance trigger. Then I do have to sell low, but get the opportunity to and buy very low.

 

[Dtail]

Rebalancing is essentially selling high and buying low. What's not to like with that?

That is also my conceptual thought, along with managing risk exposure and keeping to my AA document.

 

[RetiredHappy]

It could also be looked at as cutting the flowers and buying the weeds.

This is how I have been feeling lately.

 

[tenant13]

Out of curiosity I established a 150k robo portfolio at Schwab. The rebalancing activity every six months was dizzying. The results, way below market performance. 3 years later I shut it down.

I feel that you should either follow traditional Boggleheads approach with a couple of broad ETFs or take some fun calculated risks. Rebalancing for the sake of rebalancing is just a brokerage fee generator.

 

[COcheesehead]

Rebalancing is not for enhanced performance. You’ll end up selling your best performers. It’s for managing your personal risk tolerance.

 

[SnowballCamper]

The concluding sentences are the point. When your portfolio is set up to a specified AA, with sufficient diversification (meaning more than just two asset classes), then there is always something simple and objectively prudent to do when Mr. Market does a freakout. Just rebalance.

Investors’ humanity is why rebalancing is so fantastic. It eliminates emotion and establishes rules and guidelines that facilitate better outcomes for investors and a smoother path to achieving their goals.

The alternative is to chase returns...or be supremely lazy and never rebalance. Neither of which are good for my psyche or portfolio.

 

[SnowballCamper]

Based on that, for several years, I tried implementing a blended DCA/VA approach (sometimes called "SmartDCA") where I still invested a fixed monthly amount, but instead of peanut-butter spreading my monthly contribution across assets equally with the intent to rebalance down the road, I'd just invest more heavily in underperforming assets to bring my AA as close to my targets as possible with my fixed contribution.

I think your approach is not really different than rebalancing on a monthly basis, and perfectly reasonable. The links in post #8 above describe the negligible (to me anyway) difference among most rebalancing strategies.

 

[audreyh1]

Rebalancing is not for enhanced performance. You’ll end up selling your best performers. It’s for managing your personal risk tolerance.

To be clear you just sell a little of your best performers to buy more of your laggards,