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When to re-balance your portfolio? Thumbnail

When to re-balance your portfolio?

Everyone hears about the value disciplined investing produces.  One of the key tenants is to re-balance your portfolio if it gets away from its target asset allocation.  The only question is when and how often.

The market has fallen recently – everyone is acutely aware.  Is this a great time to re-balance our portfolio and take advantage of today’s conditions?

Not so fast.   Perhaps we should think about the best time to re-balance a long-term investor’s portfolio first?  What is the right time to re-balance?  Part of the answer is right there in the question…..long-term investor……  Let’s explore this topic further.

Some background:

  • Re-balancing is an activity that - if done in a taxable portfolio – will have tax consequences.  Since we want to keep taxes as low as possible, holding securities for 365  + 1 day will classify any Capital Gains as Long-Term Capital Gains.  This produces more favorable tax treatment.
  • If you have a Financial Plan, (and you should have one) it will make assumptions on an annual basis.  The favored “Monte Carlo” technique for stress testing a portfolio assigns random returns to each asset class.  However, it assumes you start each year with the same asset allocation and calculates the impact the markets might have on your portfolio.  It averages many paths, but they all assume you are at your target weights at the start of each year.
  • William Bengen’s  famous “4% Rule” also makes an explicit assumption that the portfolio is rebalanced once a year for 30 years.  (It also assumes you have a 50/50 portfolio of stocks/bonds – but this is a discussion for another day.)  Bengen studied what happens in the real world and what sort of spending a diversified portfolio can support for 30 years.  It is an iterative calculation that needs to make an assumption about re-balancing, and it uses once a year.

Given the information above, it makes perfect sense to re-balance just once a year.  It is most tax-efficient - but more importantly – it is the bedrock upon which most financial plans are based.  You want to achieve the retirement your financial planner has helped map out?  Then you must follow the rules used to put the plan together.

This is very important as we experience the market turmoil Covid-19 has created.  There are going to be people who believe you can enhance your returns by timing your exposures in the market.  There is no real-world evidence anyone can do this on a consistent basis, yet the media is sure to trot out examples of the few who were lucky enough to get it right.

Do not be seduced by this narrative.  Stick to your plan.  Sure, it is possible if markets rebound before you are ready for a re-balance, that you will leave “money on the table”.  But who cares?  This is greed talking.  Your long-term goal is to have a pleasant, well-funded retirement.  There is no place for actions based on Greed or Fear.  Stick to your plan and re-balance once a year.


This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities.  Past performance is no guarantee of future results, and all investing involves risk. The views expressed are those of Southern Investment Management Collective (SIMC) and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC DBA Southern Investment Management Collective, a SEC registered investment adviser.


About the Author:  Kent Fisher

Kent Fisher is a Chapel Hill, NC Fee-Only Comprehensive Wealth Manager at the Southern Investment Management Collective (SIMC).  SIMC provides comprehensive financial planning, retirement planning and investment management services to help clients organize, grow and protect their assets.  SIMC serves clients as a fiduciary, and tailors all solutions to each client's unique situation.