I Rebalanced Once a Year and It Was Enough

Once a year is enough. One date, written in the calendar, and no adjustments in between.

I did not believe that for about two years, so the rest of this is what changed my mind, and the part I got wrong was not the frequency. It was what I thought rebalancing was for.

The drift I had not looked at properly

My target was 60% stocks and 40% bonds, which I chose because it is a mix I can hold through a bad year without doing anything stupid. That is the only test that matters for a target. I will come back to it.

One afternoon I added the accounts up. The portfolio was $220,000: $154,000 in stocks and $66,000 in bonds. So 154,000 / 220,000 = 70% in stocks.

I had not bought a single extra share. The equity side had simply grown faster. The mix had walked off without me.

The fix was arithmetic. The stock target was 0.60 x 220,000 = 132,000. So I sold $22,000 of stock and bought bonds with it, which put bonds at 66,000 + 22,000 = 88,000, or exactly 40%. Fifteen minutes, inside a tax sheltered account, no tax consequence.

What I had been missing for two years is what that 70% meant. A 70/30 portfolio falls further in a bad market than a 60/40 one does. Without any decision on my part I had come to be carrying more risk than I had chosen, at the end of a long run up, which is precisely the moment when the extra risk is least welcome and most invisible.

Why more often did not turn out to be better

The difference in outcomes between rebalancing annually and rebalancing constantly is small. The difference in cost, tax and attention is large.

Every trade in a taxable account is a potential capital gain. Every trade pays a spread. And every time I opened the allocation I handed myself an opportunity to override the plan, which is the expensive part and the one I had underestimated for the whole of those two years. Most of my worst decisions came from looking too often. None came from the allocation itself.

I did add one safety valve. A fixed date can miss a violent move. If any of the main asset classes drifts more than five percentage points from its target, I rebalance then, regardless of what month it is. That has triggered rarely. Every time it did, I was grateful for an instruction written in advance by a calmer version of me.

The cheap way, which involves no selling

Two habits do most of the work.

New contributions go to whichever side is below target. If bonds are light, this month’s money buys bonds. Across a year of regular contributions, that alone keeps a growing portfolio close to its targets without a single sale.

Dividends and interest go the same way. I turned off automatic reinvestment to make that possible. Automatic reinvestment pushes every holding further in the direction it has already gone, which is drift with a subscription attached.

When those two are not enough, the selling happens inside tax sheltered accounts first. There it costs nothing. The rebalancing calculator gives you the exact dollar amounts to move once you enter your current values and your targets, which removes the mental arithmetic that used to make me put the whole job off until the following weekend.

The full method, including how to choose between calendar and threshold approaches, is in portfolio rebalancing. If you are not yet sure what your targets should be, that question comes first and it drives most of your long run outcome: asset allocation works through risk capacity against risk tolerance, which are two different things and are usually confused with each other.

Here is what I would tell anyone starting out. It is what I actually believe, and it does not sound sophisticated. Pick your date this week and put it in the calendar. Deciding in advance that you will act in one month, and only in that month, converts a hundred small judgement calls into one scheduled task. The judgement calls were never the part I was good at, and I suspect they are not the part you are good at either.