How often do you need to rebalance?

But the markets are not standing still. Over time, some asset classes outperform while others lag behind. Stocks can rise sharply during a bull market. Bonds can stabilize the portfolio during recessions. As these returns increase at different rates, the asset mix begins to diverge from your original allocations.

An 80% equity portfolio can quietly become 85% or 90% equities after a strong rally. A tough year for stocks could push you further into fixed income than you intended. Performance fluctuations, good or bad, can cause your portfolio to deviate from the risk profile you originally chose.

At some point, the mix no longer reflects your original plan. So, should you intervene and rebalance?

You can contact major ETF providers for advice. The answers are not always clear. For example, the Vanguard Growth ETF Portfolio (VGRO) states that the 80% stock and 20% bond portfolio can be rebalanced at the sub-adviser’s discretion. That leaves a lot of room for interpretation.

Others are more prescriptive. The Hamilton Enhanced Mixed Asset ETF (MIX) uses 1.25x leverage on an allocation of 60% S&P 500, 20% Treasuries, and 20% gold. Hamilton specifies that it will automatically rebalance if the weights deviate 2% from their targets. That is a close bond and implies frequent turnover.

But you’re not running a fund with institutional constraints or leverage objectives. You manage your own portfolio. For most DIY investors, a simpler approach works better. Rather than reacting to every small market move, sticking to a consistent, time-based rebalancing schedule can reduce complexity and prevent decision fatigue.

In today’s column, we’ll look at why you need to rebalance, how different time-based approaches have behaved historically, and why consistency is often more important than perfect timing.

Why rebalance your portfolio at all?

Rebalancing is the process of selling assets that have grown above their target weight and buying assets that have fallen below it, returning your portfolio to its target allocation.

When you combine assets that are not perfectly correlated and periodically rebalance them to target weights, you create what is called a rebalancing premium. The underlying explanation has to do with the way returns are constructed.

The arithmetic return is the simple average of annual or periodic returns. It covers each period separately. The geometric rate of return is the compound growth rate of your money over time. It shows what you actually earn after gains and losses build on each other.

The arithmetic average of returns does not reflect true investor experience. Investors live with the geometric return, which takes into account the effects of compounding and the impact of volatility.

Large swings in portfolio value widen the gap between arithmetic and geometric returns. Combining assets with different correlations and rebalancing them can reduce overall volatility. That reduces that gap and improves the composite result. A simple backtest illustrates this effect.

Source: testfolio.io

From April 2007 through February 2026, US stocks returned 10.5% annually. US bonds yield 3.16% annually. If you simply calculated the average of these two numbers, you would get 6.83%.

Now consider a portfolio that is 50% U.S. stocks and 50% U.S. bonds and is rebalanced once a year. That portfolio delivered an annualized return of 7.25% over the same period. The difference between 7.25% and 6.83% of 0.42% per year reflects the benefit of combining and rebalancing the two asset classes, rather than simply averaging their separate returns.

The improvement is also reflected in risk-adjusted terms. The entire equity portfolio yielded a Sharpe ratio of 0.53. Bonds yielded 0.35. The 50-50 portfolio, which was rebalanced annually, achieved a Sharpe ratio of 0.62. Although the raw return was lower than that of 100% equities, it generated more return per unit of risk taken.