Researchers found that while rebalancing does help align portfolios to client risk tolerance, the strategy hurts performance by moving assets into lower-performing sectors and racking up costs in the form of time, transaction fees and taxes.

“ As a result, the more frequently you rebalance a portfolio, the more it tends to underperform, all else equal,” said the researchers at YCharts, who, along with Nick Maggiulli, chief operating officer at Ritholtz Wealth Management, recently looked at whether one rebalancing strategy was better than another in terms of managing risk and maximizing performance.

The result was that never rebalancing edged out other strategies in terms of overall performance, the study found, though that strategy doesn’ t account for risk tolerance. In general, the researchers noted, investors tend to use one of two rebalancing strategies. The first is frequency-based rebalancing, usually quarterly or annually, regardless of what is going on in a portfolio. The second is“ drift-based” rebalancing, which is triggered only by the portfolio allocation moving outside of a set range.

The study found that the cost associated with frequent rebalancing eroded performance— which meant the quarterly rebalancing strategy performed the worst, with annualized returns of 6.70 %. Annual rebalancing fared second worst, with 6.77 %. The 10 % drift strategy yielded 6.91 %, while the leading strategy was to never rebalance, which yielded an annualized 7.14 %.

For the survey, the researchers subjected a 60 / 40 global stock / U. S. bond portfolio to four rebalancing strategies: one with quarterly rebalancing, one with annual rebalancing, one accounting for a 10 % drift and one that never rebalanced. The portfolio held the same five Vanguard mutual funds rebalanced to the same allocations: a total stock market index( 35 %), a total bond market index( 30 %), a total international stock index

The study found that the cost associated with frequent rebalancing eroded performance— which meant the quarterly rebalancing strategy performed the worst.

( 20 %), a short-term bond index( 10 %) and an emerging markets stock index( 5 %).

Looking at the last 29 years of performance data, including five bull markets and four bear markets, the researchers determined that average drift decreased as the frequency of rebalancing increased.

The study found that some strategies did better in bull markets and some in bear markets. In bear markets, more frequent rebalancing yielded better results. Never rebalancing resulted in missing out on secular growth when underperforming asset classes become market leaders.

One way to rebalance efficiently without accruing costs— if the clients are still accumulating assets— is to avoid selling existing positions and instead invest new money in the underweight assets, the researchers said.

“ The optimal rebalancing strategy for managing risk, maximizing performance and minimizing costs incurred by advisors can change over time, based in part on market conditions,” the study said.“ However, more important than any of these factors is the client’ s comfort level with the chosen rebalancing strategy. As is often said, peace of mind can be priceless.”

— Jennifer Lea Reed

JUNE 2025 | FINANCIAL ADVISOR MAGAZINE | 9