The Art (and Science) of Rebalancing
24th October 2025
Why it matters, and what it really does
When you invest with a long-term horizon, one of the most important structural decisions is your asset allocation: how much to put into equities vs bonds vs other asset classes (or sub‐classes: large cap vs small cap; domestic vs international; alternatives; etc). That decision sets the expected return-risk (volatility) trade-off of your portfolio. It is rooted in classic theory such as Modern Portfolio Theory (MPT) developed by Harry Markowitz, which argues that by choosing the weights of assets you can maximise return for a given level of risk (variance) or minimise risk for given return.
Once a portfolio is built with a target allocation, however, market movements will cause drift: some assets will outperform, others underperform, so the weightings move away from the target. For example, in a 60% equities / 40% bonds portfolio, a strong equities rally may push the allocation to 70/30 - increasing risk beyond what you originally intended. Rebalancing is the act of resetting back (or toward) the target: selling some of what has grown (winners) and buying some of what has lagged (to restore weights) so the portfolio remains aligned with your risk-return plan.
When you invest with a long-term horizon, one of the most important structural decisions is your asset allocation: how much to put into equities vs bonds vs other asset classes (or sub‐classes: large cap vs small cap; domestic vs international; alternatives; etc). That decision sets the expected return-risk (volatility) trade-off of your portfolio. It is rooted in classic theory such as Modern Portfolio Theory (MPT) developed by Harry Markowitz, which argues that by choosing the weights of assets you can maximise return for a given level of risk (variance) or minimise risk for given return.
Once a portfolio is built with a target allocation, however, market movements will cause drift: some assets will outperform, others underperform, so the weightings move away from the target. For example, in a 60% equities / 40% bonds portfolio, a strong equities rally may push the allocation to 70/30 - increasing risk beyond what you originally intended. Rebalancing is the act of resetting back (or toward) the target: selling some of what has grown (winners) and buying some of what has lagged (to restore weights) so the portfolio remains aligned with your risk-return plan.
In plain terms:
From the research side, rebalancing is shown to impact both risk and return:
- It forces you to sell high (the assets that have run up) and buy low (the ones that have weakened).
- It maintains your original risk profile (you’re not inadvertently taking more risk after a run up).
- It prevents your portfolio from slowly morphing into a completely different strategy without you noticing (asset-class drift).
From the research side, rebalancing is shown to impact both risk and return:
- A detailed article found that different rebalancing decisions (frequency; threshold vs calendar; asset‐class mix) affect risk and return in multi‐asset portfolios.
- A study by Vanguard uses a utility‐based probabilistic model of returns and transaction costs to identify optimal multi-asset rebalancing methods.
- Some newer work suggests that optimal rebalancing can reduce market variability (in the aggregate) - i.e., beyond the individual portfolio, there’s a systemic risk-control dimension.
Trimming winners & buying into dips - the “averaging in/out” dimension
A key behavioural element of rebalancing is: when an asset class or fund becomes a large portion of your portfolio due to strong performance, that means more of your money is now exposed to that asset - which often means more risk. So trimming makes sense. Conversely, when another asset class has dipped (and so its weight fallen below target), topping up it means you’re buying more of something “out-of-favour” which may give a better long-term opportunity. In effect, you’re averaging into that asset at a lower valuation relative to your original target.
Research supports this concept: for example “Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle” shows that a rebalanced portfolio forces you to sell appreciated assets and buy the depreciated ones - that action is distinct from mere diversification and can generate an incremental return (the so-called “diversification return”).
Another empirical study of ETF portfolios found that various rebalancing strategies (across asset classes) do indeed yield different outcomes.
What does this mean in practical terms for a long-term portfolio?
If equities surge, your allocation to equities rises above target → risk rises; so you sell some equities and buy bonds or other asset classes, thus locking in some gains and reducing risk.
If equities fall, then their weight shrinks → you buy more equities to bring the allocation back up, thereby “buying the dip” in a disciplined way.
Over time this can reduce portfolio volatility (because you’re not letting the big winners dominate) and keep you from excessively tilting into one asset class after a run.
From a “long-term portfolio” (say 10+ years) perspective, this ensures you are systematically applying contrarian discipline: buy when others perhaps are cautious; sell when assets are “hot”. It also helps the “stay the course” behaviour required for long-term success.
Effects on Volatility, Return and Long‐term Outcomes
Let’s break into the key outcomes:
1. Volatility / risk control
Research shows that by rebalancing you can reduce the drift of your portfolio away from its risk target. For example, if you begin with a 60/40 equities/bonds split, without rebalancing equities may come to dominate, and your expected volatility will increase. Rebalancing brings you back toward your target risk.
In addition, some work shows that in high‐volatility environments, rebalancing adds value by enabling disciplined topping up of depreciated assets.
2. Return (“rebalancing bonus” / diversification return)
There is often talk about a “rebalancing bonus” - the idea that rebalancing not only controls risk but may boost long-term returns by virtue of the disciplined “sell high / buy low” behaviour. For instance:
The Willenbrock paper shows that the so-called diversification return is driven more by the rebalancing action than by the variance reduction per se.
However, not all research is effusive. The paper “What Does Rebalancing Really Achieve?” by Cuthbertson, Hayley, Motson & Nitzsche caution that the literature often conflates diversification return with rebalancing return, and that over finite horizons the advantage of rebalancing may be overstated.
3. Long-term portfolio outcomes
From a long-term perspective, rebalancing helps keep you on your risk-return path. It helps prevent your portfolio turning into something different just because one asset class ran hot. That means you’re more likely to achieve your expected return for the risk you intended. On the flip side, if you never rebalance, you might have higher returns (if one asset class keeps outperforming) but you will have taken on more risk than you bargained for - which may hurt in drawdowns.
For instance, the backgrounder from the Portfolio Construction Forum notes that one challenge is choosing between calendar vs deviation/threshold‐based rebalancing (i.e., how much drift to allow, and how often to act).
T. Rowe Price’s piece also suggests monitoring frequently but only rebalancing when a meaningful drift has occurred (vs rigid frequent rebalancing).
4. Costs and trade-offs
It’s not all upside. There are costs to rebalancing: transaction costs, tax costs (realising gains), time/effort, and even potential performance drag if the asset you’re trimming keeps going up strongly. Indeed, the article “Strategic Rebalancing” from MAN highlights that in a prolonged strong trend for one asset, rebalancing (which means selling winners) can hurt performance.
Further, the recent NBER paper on “Unintended Consequences of Rebalancing” shows that large institutional rebalancing flows are predictable and may cost investors via market impact.
In short: there’s no “free lunch”. Rebalancing is a useful discipline - but it must be applied sensibly.
A key behavioural element of rebalancing is: when an asset class or fund becomes a large portion of your portfolio due to strong performance, that means more of your money is now exposed to that asset - which often means more risk. So trimming makes sense. Conversely, when another asset class has dipped (and so its weight fallen below target), topping up it means you’re buying more of something “out-of-favour” which may give a better long-term opportunity. In effect, you’re averaging into that asset at a lower valuation relative to your original target.
Research supports this concept: for example “Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle” shows that a rebalanced portfolio forces you to sell appreciated assets and buy the depreciated ones - that action is distinct from mere diversification and can generate an incremental return (the so-called “diversification return”).
Another empirical study of ETF portfolios found that various rebalancing strategies (across asset classes) do indeed yield different outcomes.
What does this mean in practical terms for a long-term portfolio?
If equities surge, your allocation to equities rises above target → risk rises; so you sell some equities and buy bonds or other asset classes, thus locking in some gains and reducing risk.
If equities fall, then their weight shrinks → you buy more equities to bring the allocation back up, thereby “buying the dip” in a disciplined way.
Over time this can reduce portfolio volatility (because you’re not letting the big winners dominate) and keep you from excessively tilting into one asset class after a run.
From a “long-term portfolio” (say 10+ years) perspective, this ensures you are systematically applying contrarian discipline: buy when others perhaps are cautious; sell when assets are “hot”. It also helps the “stay the course” behaviour required for long-term success.
Effects on Volatility, Return and Long‐term Outcomes
Let’s break into the key outcomes:
1. Volatility / risk control
Research shows that by rebalancing you can reduce the drift of your portfolio away from its risk target. For example, if you begin with a 60/40 equities/bonds split, without rebalancing equities may come to dominate, and your expected volatility will increase. Rebalancing brings you back toward your target risk.
In addition, some work shows that in high‐volatility environments, rebalancing adds value by enabling disciplined topping up of depreciated assets.
2. Return (“rebalancing bonus” / diversification return)
There is often talk about a “rebalancing bonus” - the idea that rebalancing not only controls risk but may boost long-term returns by virtue of the disciplined “sell high / buy low” behaviour. For instance:
The Willenbrock paper shows that the so-called diversification return is driven more by the rebalancing action than by the variance reduction per se.
However, not all research is effusive. The paper “What Does Rebalancing Really Achieve?” by Cuthbertson, Hayley, Motson & Nitzsche caution that the literature often conflates diversification return with rebalancing return, and that over finite horizons the advantage of rebalancing may be overstated.
3. Long-term portfolio outcomes
From a long-term perspective, rebalancing helps keep you on your risk-return path. It helps prevent your portfolio turning into something different just because one asset class ran hot. That means you’re more likely to achieve your expected return for the risk you intended. On the flip side, if you never rebalance, you might have higher returns (if one asset class keeps outperforming) but you will have taken on more risk than you bargained for - which may hurt in drawdowns.
For instance, the backgrounder from the Portfolio Construction Forum notes that one challenge is choosing between calendar vs deviation/threshold‐based rebalancing (i.e., how much drift to allow, and how often to act).
T. Rowe Price’s piece also suggests monitoring frequently but only rebalancing when a meaningful drift has occurred (vs rigid frequent rebalancing).
4. Costs and trade-offs
It’s not all upside. There are costs to rebalancing: transaction costs, tax costs (realising gains), time/effort, and even potential performance drag if the asset you’re trimming keeps going up strongly. Indeed, the article “Strategic Rebalancing” from MAN highlights that in a prolonged strong trend for one asset, rebalancing (which means selling winners) can hurt performance.
Further, the recent NBER paper on “Unintended Consequences of Rebalancing” shows that large institutional rebalancing flows are predictable and may cost investors via market impact.
In short: there’s no “free lunch”. Rebalancing is a useful discipline - but it must be applied sensibly.
Practical Implementation: How to Rebalance in the Real World
Here are practical considerations for long-term investors (such as the regular readers of this Brigantia blog) when embedding rebalancing into their portfolios.
Target weights + Tolerance bands
Choose your target allocation (e.g., 60/40 equities/bonds; or more granular multi-asset).
Decide on a tolerance band (for example ±5 % or ±10 % drift from target) or a threshold rule (if equities grow > 10% above target then rebalance). Research suggests that allowing a small drift and only rebalancing when a threshold is breached may be more efficient than rigid frequent calendar-rebalance.
Monitor your portfolio (quarterly, semi-annually) to see whether any asset class has drifted beyond the band.
Frequency: calendar vs threshold vs opportunistic
Calendar rebalancing: e.g., annually or semi-annually regardless of drift. Simple, easy to operationalise.
Threshold/deviation rebalancing: only act when weightings drift by a defined amount. More efficient in some cases.
Opportunistic rebalancing: “Look more often, act only when good opportunities appear (e.g., after drawdowns)”. Research by Parametric shows that during periods of volatility rebalancing via an overlay strategy can add value.
Mechanics: trimming winners, topping up laggards
Review which asset classes have grown beyond target - those are the “winners”. You may sell (or allocate new monies away from them) to bring back to target.
Review which asset classes have fallen below target - the “laggards”. You may buy more (or allocate new monies toward them) to restore target.
Be mindful of tax implications: selling winners may realise gains; topping up laggards (via new contributions) can avoid sales.
Consider transaction costs: frequent trading reduces the benefit of rebalancing. Large drag in active transaction environments.
Behavioural and psychological checklist
Recognise the instinct: we want to hold winners (they feel “good to own”) and we hesitate to buy what’s underperforming.
Use rebalancing as a discipline to counter those instincts: selling winners when we “feel they will keep going” and buying laggards when we “fear they may fall further”. That discipline is valuable.
Keep your long-term goal in sight: remember that the objective is staying within your risk-return profile over decades, not chasing short-term performance.
Recognise the cost of inaction: drift increases risk silently, and that can hurt when a drawdown hits. Also recognise the cost of overdoing: too frequent trading, short-term timing, too reactive to market noise.
When Rebalancing Gets Over-Used (and the Pitfalls)
It’s tempting to assume “more is better” when it comes to rebalancing, but the literature flags several important cautions.
Return drag in strong trending markets
If one asset class (say equities) enters a long-lasting up-trend, a rigid rebalancing policy will force you to sell winners and buy laggards - thus curtailing your exposure to the outperformer. Over a long bull run, that could reduce returns relative to staying invested. The “Strategic Rebalancing” paper from MAN spells this out: sometimes winners keep winning, and by trimming them you lose.
Costs, taxes and market impact
As mentioned earlier: every trade has friction. Large institutional flows from rebalancing can even be gamed by market participants. The NBER research shows funds’ rebalancing leads to predictable price patterns (e.g., selling stocks after a rally because rebalance flows press).
Also, if you rebalance too frequently you may incur higher trading costs and reduce the benefit. Some empirical research (20-year U.S. study) found that periodic vs buy-hold difference was only 11 basis points on average.
Over-diversification / target drift illusions
Rebalancing is sometimes portrayed as a magic bullet. But the paper “What Does Rebalancing Really Achieve?” cautions against overhyping: the benefit of rebalancing depends on the volatility and correlation structure of the assets, the horizon, the costs, and whether you stay truly diversified. If one uses rebalancing to justify very broad or exotic allocations without considering fundamentals, the benefit may be negligible.
Behavioural trap: belief in timing
If an investor treats rebalancing as a timing tool (“I’ll sell here, buy there because this asset is down”) rather than a discipline tool, they may slide into market-timing behaviours which often hurt. The point of rebalancing is to maintain structure, not to chase turns.
Summary of key pitfalls
Here are practical considerations for long-term investors (such as the regular readers of this Brigantia blog) when embedding rebalancing into their portfolios.
Target weights + Tolerance bands
Choose your target allocation (e.g., 60/40 equities/bonds; or more granular multi-asset).
Decide on a tolerance band (for example ±5 % or ±10 % drift from target) or a threshold rule (if equities grow > 10% above target then rebalance). Research suggests that allowing a small drift and only rebalancing when a threshold is breached may be more efficient than rigid frequent calendar-rebalance.
Monitor your portfolio (quarterly, semi-annually) to see whether any asset class has drifted beyond the band.
Frequency: calendar vs threshold vs opportunistic
Calendar rebalancing: e.g., annually or semi-annually regardless of drift. Simple, easy to operationalise.
Threshold/deviation rebalancing: only act when weightings drift by a defined amount. More efficient in some cases.
Opportunistic rebalancing: “Look more often, act only when good opportunities appear (e.g., after drawdowns)”. Research by Parametric shows that during periods of volatility rebalancing via an overlay strategy can add value.
Mechanics: trimming winners, topping up laggards
Review which asset classes have grown beyond target - those are the “winners”. You may sell (or allocate new monies away from them) to bring back to target.
Review which asset classes have fallen below target - the “laggards”. You may buy more (or allocate new monies toward them) to restore target.
Be mindful of tax implications: selling winners may realise gains; topping up laggards (via new contributions) can avoid sales.
Consider transaction costs: frequent trading reduces the benefit of rebalancing. Large drag in active transaction environments.
Behavioural and psychological checklist
Recognise the instinct: we want to hold winners (they feel “good to own”) and we hesitate to buy what’s underperforming.
Use rebalancing as a discipline to counter those instincts: selling winners when we “feel they will keep going” and buying laggards when we “fear they may fall further”. That discipline is valuable.
Keep your long-term goal in sight: remember that the objective is staying within your risk-return profile over decades, not chasing short-term performance.
Recognise the cost of inaction: drift increases risk silently, and that can hurt when a drawdown hits. Also recognise the cost of overdoing: too frequent trading, short-term timing, too reactive to market noise.
When Rebalancing Gets Over-Used (and the Pitfalls)
It’s tempting to assume “more is better” when it comes to rebalancing, but the literature flags several important cautions.
Return drag in strong trending markets
If one asset class (say equities) enters a long-lasting up-trend, a rigid rebalancing policy will force you to sell winners and buy laggards - thus curtailing your exposure to the outperformer. Over a long bull run, that could reduce returns relative to staying invested. The “Strategic Rebalancing” paper from MAN spells this out: sometimes winners keep winning, and by trimming them you lose.
Costs, taxes and market impact
As mentioned earlier: every trade has friction. Large institutional flows from rebalancing can even be gamed by market participants. The NBER research shows funds’ rebalancing leads to predictable price patterns (e.g., selling stocks after a rally because rebalance flows press).
Also, if you rebalance too frequently you may incur higher trading costs and reduce the benefit. Some empirical research (20-year U.S. study) found that periodic vs buy-hold difference was only 11 basis points on average.
Over-diversification / target drift illusions
Rebalancing is sometimes portrayed as a magic bullet. But the paper “What Does Rebalancing Really Achieve?” cautions against overhyping: the benefit of rebalancing depends on the volatility and correlation structure of the assets, the horizon, the costs, and whether you stay truly diversified. If one uses rebalancing to justify very broad or exotic allocations without considering fundamentals, the benefit may be negligible.
Behavioural trap: belief in timing
If an investor treats rebalancing as a timing tool (“I’ll sell here, buy there because this asset is down”) rather than a discipline tool, they may slide into market-timing behaviours which often hurt. The point of rebalancing is to maintain structure, not to chase turns.
Summary of key pitfalls
- Selling winners too early when their out-performance continues.
- Trading too often, increasing costs.
- Ignoring tax / frictions.
- Letting rebalancing become “timing” rather than discipline.
- Mistaking diversification + rebalancing for omnipotence (i.e., believing the portfolio is “safe” whatever happens).
The Big Picture: Why Rebalancing Fits into a Long-Term Portfolio Strategy
Let’s step back and look at the philosophical and practical framing.
Link to asset allocation and diversification
Your asset allocation is your strategic decision: how you want risk and return to behave for you long term. Diversification is the mechanism by which you reduce reliance on any single asset or outcome. Rebalancing is the maintenance mechanism to keep your strategic plan in place. Without rebalancing, drift erodes your intended allocation. Without diversification, you expose yourself to idiosyncratic risk. Both are needed.
Aligning investor behaviour with structure
One of the hardest things about investing is behavioural - we tend to chase what’s done well, we avoid what’s done poorly, we change behaviour when emotionally uncomfortable, we deviate from our plan. Rebalancing enforces structure: it counteracts these biases. By enforcing “sell the winners, buy the laggards” you override the natural tendency to “buy the winners and hold forever”. This supports the theme of your blog: the behavioural dimension of rebalancing.
The humble aim: staying within risk tolerance & capturing returns
Think of rebalancing as a governor on your portfolio: it doesn’t guarantee you’ll beat all comers, but it helps keep you on your intended ride rather than veering into a different (and possibly unintended) risk path. Over decades, that consistency often matters as much (or more) than chasing big wins.
Rebalancing as part of the investment policy statement
For long-term investors (pension funds, endowments, individual investors with decades ahead), rebalancing is part of the investment policy statement (IPS): “We will maintain 60/40 allocation, we will rebalance if equities drift ±7% from target, we will review semi-annually, we will use new contributions to underweight assets where possible.” Embedding those rules ahead of time removes emotion from the loop.
Linking to the psychology side
Here is where Morgan Housel's "The Psychology of Money" is spot-on. In that book, Housel talks about how human behaviour, fear, greed, ego, envy, impatience all affect investing behaviour. Rebalancing is a discipline to help manage the “my winners will keep winning” bias and the “I don’t want to buy the losers” bias. It’s easy to say “I want to buy the dip”, but hard to do when the dip might go lower and you feel anxiety. Having a rule (rebalance to target) helps overcome that.
Similarly: the idea of “selling winners” triggers regret (what if it keeps going?). Hard. Rebalancing forces you to face that discomfort - because the plan says “yes, we realised gain, we shift back to target”. That’s behavioural mastery in action.
Recognising that rebalancing is not a secular alpha engine
It’s tempting to think rebalancing will provide extra returns over and above everything. But the research emphasises: the returns from rebalancing are moderate, not dramatic. The value is more in risk-control and discipline. The statement in “What Does Rebalancing Really Achieve?” that the literature overstates the benefits over finite horizons is a warning: don’t assume rebalancing will make you a star performer - it helps you stay on your path.
Why the rebalancing conversation is especially relevant now
In today’s environment, several factors make disciplined rebalancing more important:
Suggested Further Reading
Here are some books and papers relevant to the subject of rebalancing:
Books:
The Psychology of Money by Morgan Housel - a favourite at Brigantia! For the behavioural dimension of investing, including the discomfort of selling winners and buying losers.
The Intelligent Investor by Benjamin Graham - timeless on the psychological and structural aspects of investing.
The Intelligent Asset Allocator by William Bernstein - for asset-allocation structure, which is the foundation upon which rebalancing sits.
Portfolio Rebalancing by Edward E. Qian - a more technical treatment of rebalancing, volatility effects, return effects, threshold vs periodic strategies.
Beyond Diversification: What Every Investor Needs to Know by Dirk and Jack - emphasising allocation and rebalancing in addition to diversification.
Key research/papers:
“What Does Rebalancing Really Achieve?” by Cuthbertson, Hayley, Motson & Nitzsche.
“The Unintended Consequences of Rebalancing” (NBER) - on market impact of rebalancing flows.
“Rational Rebalancing: An Analytical Approach to Multi-Asset Portfolio Rebalancing Decisions” (Vanguard).
“Measuring Portfolio Rebalancing Benefits in Equity Markets” by PM Research.
“Trading Strategies, Portfolio Monitoring and Rebalancing” (book chapter) - good reference to rebalancing mechanics.
Key Takeaways for the Brigantia Investor
Let’s step back and look at the philosophical and practical framing.
Link to asset allocation and diversification
Your asset allocation is your strategic decision: how you want risk and return to behave for you long term. Diversification is the mechanism by which you reduce reliance on any single asset or outcome. Rebalancing is the maintenance mechanism to keep your strategic plan in place. Without rebalancing, drift erodes your intended allocation. Without diversification, you expose yourself to idiosyncratic risk. Both are needed.
Aligning investor behaviour with structure
One of the hardest things about investing is behavioural - we tend to chase what’s done well, we avoid what’s done poorly, we change behaviour when emotionally uncomfortable, we deviate from our plan. Rebalancing enforces structure: it counteracts these biases. By enforcing “sell the winners, buy the laggards” you override the natural tendency to “buy the winners and hold forever”. This supports the theme of your blog: the behavioural dimension of rebalancing.
The humble aim: staying within risk tolerance & capturing returns
Think of rebalancing as a governor on your portfolio: it doesn’t guarantee you’ll beat all comers, but it helps keep you on your intended ride rather than veering into a different (and possibly unintended) risk path. Over decades, that consistency often matters as much (or more) than chasing big wins.
Rebalancing as part of the investment policy statement
For long-term investors (pension funds, endowments, individual investors with decades ahead), rebalancing is part of the investment policy statement (IPS): “We will maintain 60/40 allocation, we will rebalance if equities drift ±7% from target, we will review semi-annually, we will use new contributions to underweight assets where possible.” Embedding those rules ahead of time removes emotion from the loop.
Linking to the psychology side
Here is where Morgan Housel's "The Psychology of Money" is spot-on. In that book, Housel talks about how human behaviour, fear, greed, ego, envy, impatience all affect investing behaviour. Rebalancing is a discipline to help manage the “my winners will keep winning” bias and the “I don’t want to buy the losers” bias. It’s easy to say “I want to buy the dip”, but hard to do when the dip might go lower and you feel anxiety. Having a rule (rebalance to target) helps overcome that.
Similarly: the idea of “selling winners” triggers regret (what if it keeps going?). Hard. Rebalancing forces you to face that discomfort - because the plan says “yes, we realised gain, we shift back to target”. That’s behavioural mastery in action.
Recognising that rebalancing is not a secular alpha engine
It’s tempting to think rebalancing will provide extra returns over and above everything. But the research emphasises: the returns from rebalancing are moderate, not dramatic. The value is more in risk-control and discipline. The statement in “What Does Rebalancing Really Achieve?” that the literature overstates the benefits over finite horizons is a warning: don’t assume rebalancing will make you a star performer - it helps you stay on your path.
Why the rebalancing conversation is especially relevant now
In today’s environment, several factors make disciplined rebalancing more important:
- Asset classes have diverged widely (equities vs bonds vs alternatives). Large rallies (or falls) create significant drift.
- Market valuations are elevated in some segments, so the risk of “big winners” dominating is real.
- Volatility might be set to rise (macro uncertainty, geopolitics, inflation), hence maintaining risk discipline is critical.
- The behavioural risk is high: many investors fall in love with their winners, ignore the laggards, end up with concentrated bets. A rebalancing regime counters that drift unconsciously.
Suggested Further Reading
Here are some books and papers relevant to the subject of rebalancing:
Books:
The Psychology of Money by Morgan Housel - a favourite at Brigantia! For the behavioural dimension of investing, including the discomfort of selling winners and buying losers.
The Intelligent Investor by Benjamin Graham - timeless on the psychological and structural aspects of investing.
The Intelligent Asset Allocator by William Bernstein - for asset-allocation structure, which is the foundation upon which rebalancing sits.
Portfolio Rebalancing by Edward E. Qian - a more technical treatment of rebalancing, volatility effects, return effects, threshold vs periodic strategies.
Beyond Diversification: What Every Investor Needs to Know by Dirk and Jack - emphasising allocation and rebalancing in addition to diversification.
Key research/papers:
“What Does Rebalancing Really Achieve?” by Cuthbertson, Hayley, Motson & Nitzsche.
“The Unintended Consequences of Rebalancing” (NBER) - on market impact of rebalancing flows.
“Rational Rebalancing: An Analytical Approach to Multi-Asset Portfolio Rebalancing Decisions” (Vanguard).
“Measuring Portfolio Rebalancing Benefits in Equity Markets” by PM Research.
“Trading Strategies, Portfolio Monitoring and Rebalancing” (book chapter) - good reference to rebalancing mechanics.
Key Takeaways for the Brigantia Investor
- Rebalancing is a structural discipline, not a gimmick.
- It helps you stay aligned to your risk-return target, it helps control volatility, and it helps you impose the “sell winners / buy laggards” discipline.
- But: it’s not free. It comes with trade-offs (costs, tax, possible under-performance if winners keep winning).
- The optimal approach is likely somewhere between “never rebalance” and “rebalance every week”. Choose tolerance bands, monitor, and act when drift is meaningful.
- The biggest risk is drift: allowing the portfolio to become something you didn’t intend (e.g., overweight equities after a long rally) and then being exposed to a drawdown you didn’t sign up for.
- Behaviourally, rebalancing is a tool to overcome our biases: we love winners; we hate laggards. Having a rule helps.
- For long-term portfolios (10 + years), consistency matters more than chasing short-term returns. A disciplined, well-implemented rebalancing regime aids that consistency.
- Finally: review your policy regularly, keep things simple, and always match your rebalancing rule to your goals, tolerance, and the size/complexity of your holdings.
