Does Portfolio Rebalancing Work? Yes, Even in Bear Markets (2024)

FAQs

Does Portfolio Rebalancing Work? Yes, Even in Bear Markets? ›

Yes, Even in Bear Markets. Consider adopting a portfolio rebalancing strategy, even during down markets.

Rebalancing is an important way to help minimize volatility in a portfolio and may improve long-term returns. Setting specific thresholds that trigger rebalancing can help eliminate emotion from the rebalancing process.

It states that rebalancing between assets should occur only if an asset or category has drifted from its original target by an absolute percentage of 5% or a relative of 25% whichever is less.

Bottom line. Rebalancing your portfolio is a great way to be in tune with your finances. It ensures you remain diversified and on track to reach your long-term financial goals. Consider rebalancing your portfolio regularly or when your portfolio drifts too far from your desired allocations.

You should consider adopting a portfolio rebalancing strategy—even during down markets when it's tempting to let your “winners” keep growing while your “losers” are taking their lumps.

Many investors find January to be a good month to establish disciplined annual rebalancing since they will know their portfolio is allocated as intended at the start of every New Year.

Set a time to rebalance. Once a year is sufficient, although some investors prefer to rebalance quarterly or twice per year. There's no wrong or right strategy, although less frequent rebalancing will potentially lead to greater stock allocations and higher overall returns, along with greater volatility.

Selling assets to rebalance a portfolio will generate trading costs and perhaps also capital gains taxes.

It reduces risk and ensures that your portfolio mix isn't out of balance. While some investors choose to rebalance manually, most choose automatic rebalancing for its simplicity and time-savings. Others choose this approach because it ensures the task won't be overlooked because of a memory lapse.

One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.

What is the best frequency for rebalancing? ›

Monthly and quarterly assessments are typically preferred, because weekly rebalancing would be overly expensive and a yearly approach would allow for too much intermediate portfolio drift. The ideal frequency of rebalancing must be determined based on time constraints, transaction costs, and allowable drift.

The 10,5,3 rule offers a simple guideline. Expect around 10% returns from long-term equity investments, 5% from debt instruments, and 3% from savings bank accounts. This rule helps investors set realistic expectations and allocate their investments accordingly.

Disadvantages. Rebalancing involves transaction costs, which may reduce net income. Selling securities that have increased in value to rebalance a portfolio might lead to investors missing out on an upward price trend of those securities.

Rebalancing will reduce the portfolio's volatility, but the cost of rebalancing will also reduce the portfolio's net returns.

Smart Rebalance is a classic strategy that has been used for decades in the traditional industry. The core of the strategy is to increase the total amount of assets by selling high and buying low, at the same time maintaining the portfolio basically unchanged.

Therefore, if your portfolio objective is balanced growth and income, for example, you can expect a long-term average return between 4.5% and 6.5%. Each portfolio objective shown below includes a mix of equity and fixed-income investments that should reflect your comfort with risk and your investment time frame.

With that in mind, let's look at how often you should rebalance if you use time-based rebalancing. The most common time frame that people use is annual rebalancing. They go in once a year to clean up their portfolio.

The major friction that investors face in rebalancing their portfolios is capital gains taxes, which are triggered by the sale of assets.

A diversified portfolio could, in principle, have higher returns or higher volatility than an undiversified portfolio if the assets in the two portfolios are systematically different.