There is no ironclad formula to rebalancing. It all depends on how comfortable you are with your portfolio deviating from its target allocation.
Some investors rebalance portfolios quarterly, semi-annually or annually. Others prefer to rebalance only when a portfolio mix strays beyond a by a predetermined minimum percentage — such as 1 percent, 5 percent or 10 percent — of a target allocation.
“With the stock market reaching new highs, we are not recommending any changes and continue to rebalance clients’ portfolios once a year,” said Cynthia Turkington, a CFP and founder of Fair Trust Financial in North Oaks, Minnesota. “When you rebalance once a year, it minimizes trading costs.”
Don’t forget about taxes when you rebalance. “Think about harvesting some tax losses for this calendar year so that you maximize the impact if tax rates decrease next year,” said Allan Katz, a CFP and founder of Comprehensive Wealth Management Group in New York.
The best rebalancing strategy is the one you understand and feel good about and can consistently execute.
A 2015 Vanguard study analyzed the impact of rebalancing on the performance of several hypothetical portfolios from 1926 through 2014.
Vanguard analysts concluded that “just as there is no universally optimal asset allocation, there is no universally optimal rebalancing strategy. The only clear advantage so far as maintaining a portfolio’s risk-and-return characteristics is that a rebalanced portfolio more closely aligns with the characteristics of the target asset allocation than with a never-rebalanced portfolio.”
