When to Rebalance Your Portfolio

In the last few years, “rebalancing” has become all the rage – with the theory being that choosing an asset allocation of stocks, bonds, etc and sticking to it will force you as an investor to buy low and sell high.

This approach has become so ubiquitous that many 401k plans (and funds) offer automatic rebalancing on a yearly or quarterly basis.

Now, the Journal of Financial Planning reports that this approach is suboptimal. Research shows that a better approach to rebalancing is to look often, but only rebalance when assets have substantially depreciated/appreciated.

A more comprehensive study by Ben Stein & Philip DeMuth goes through 10,000 Monte Carlo Simulations to find an even better strategy to rebalancing: NEVER.

Rebalancing had the effect of reducing both volatility (risk) and returns. Investors with long time horizons (e.g., 401ks) should wait out the bad times, perhaps buy when securities are undervalued (such as now), but resist the urge to rebalance automatically.

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