STUDY
Rebalancing: Once/Year vs Never
Should you rebalance your portfolio back to target weights every year, or set it once and let it drift? This study compares a simple 60/40 portfolio with and without annual rebalancing.
Educational content only. Not personalized investment or tax advice. Past performance does not guarantee future results.
TL;DR
- Not rebalancing lets winners run, which can slightly boost returns but also increases risk over time.
- Annual rebalancing keeps your risk profile closer to your original target, usually with only small performance differences.
- The main benefit of rebalancing is risk and behavior control, not squeezing extra return.
Method
We model two investors who both start with the same 60/40 portfolio:
- Initial mix: 60% global stocks, 40% high-quality bonds.
- Same starting value: both portfolios start at 1.00×.
- Same return path: both experience the same stock and bond returns each period.
The only difference is how they handle drift:
- Never Rebalance: set 60/40 once and let weights drift as markets move.
- Rebalance Annually: once per year, reset back to 60% stocks / 40% bonds.
We use a stylized 20-year path with dividends/interest reinvested. Fees and taxes are ignored to isolate the pure effect of drift vs annual rebalancing. This is an illustration, not a forecast.
Notes
- Both portfolios hold the same building blocks; no market timing or factor tilt beyond drift.
- No new contributions here; we watch what happens to the same starting lump over 20 years.
- In real life, taxes, transaction costs, and contribution schedules affect how you rebalance.
- Educational illustration only. Not personalized investment advice or a guarantee of results.
Key chart
Normalized growth of a 60/40 portfolio with and without annual rebalancing. Both start at 1.00×. The gap reflects the trade-off: letting stocks take over versus keeping risk closer to target.
Stylized chart for intuition. Real outcomes vary by assets, period, fees, taxes, and your chosen rules.
What the data says
“Never rebalance” tends to drift to a higher stock weight after long periods where stocks beat bonds. That can slightly boost growth, but it also means you may be running more risk than you intended.
Annual rebalancing often lags slightly at the peak, but can hold up better in deeper drawdowns because you keep trimming what outperformed and topping up what lagged back to 60/40.
The usual outcome: small differences in CAGR, bigger differences in how much equity exposure you end up with late in the game.
When annual rebalancing makes sense
- You picked a target allocation because that risk level fits your real life.
- You do not want a quiet drift toward 80/20 or 90/10 without noticing.
- You want a calendar rule that prevents ad-hoc emotional decisions.
- You care more about risk staying stable than chasing marginal return differences.
When “set and drift” might be tolerable
- You start conservative and are comfortable drifting slightly more aggressive over time.
- You have a long horizon and genuinely high risk tolerance.
- You “soft rebalance” using contributions/withdrawals rather than explicit trades.
- You still monitor weights periodically and cap concentration risk.
Drift is not neutral. It is a bet that your risk profile can change and you will still be fine with it.
Summary
| Series | CAGR | Max DD | Worst 12-mo |
|---|---|---|---|
| 60/40 – Never Rebalance | ≈9.4% | ≈−24.0% | ≈−20.0% |
| 60/40 – Rebalance Annually | ≈9.0% | ≈−20.0% | ≈−17.0% |
Stylized values consistent with the chart path. Real outcomes depend on assets, period, taxes, costs, and the exact rebalance rule.
CLUSTER
Next steps: rebalancing rules you can actually follow
A simple workflow: when to rebalance and how to keep it boring.
A trigger-based alternative that can reduce unnecessary trades.
Where rebalancing matters most: equity + bond sleeves over long horizons.
A classic case where rebalancing affects both risk and outcomes.
CLUSTER
Next steps: minimize implementation drag (fees, spreads, and FX)
Rebalancing too often can amplify spreads/FX costs. Keep it efficient.
Rebalancing is trading. Use execution rules that prevent bad fills.
If your rebalancing triggers conversions, FX leakage can add up fast.
If contributions are automated, you can “rebalance by contributions” first.
FAQ
Is rebalancing once per year really enough?
For a simple stock/bond mix, annual rebalancing is usually enough. The goal is not to chase every move, but to prevent slow drift from materially changing your risk.
Does rebalancing improve returns or mainly control risk?
It can slightly help or slightly hurt returns depending on the period. The reliable benefit is risk control: you keep your equity share from drifting far away from target.
For a practical rule set, see Rebalancing Without Stress .
Can I rebalance using only new contributions and withdrawals?
Often yes. Directing new money into underweight assets (and withdrawing from overweight assets) is “soft rebalancing” that can reduce trades, costs, and taxes.
You still need to check your actual weights at least once a year and correct if drift gets too large.
Should I rebalance during a big crash or only on schedule?
With a calendar rule, waiting for the next scheduled rebalance is fine. With tolerance bands, a large move can trigger an earlier rebalance when allocations cross preset thresholds. The key is rules decided in advance.
If you want rebalancing to stay effortless, pick a platform where you can actually maintain the plan for years.
Disclosure: We may earn a commission if you open an account using our links. You do not pay extra.
Want to visualize drift? Chart a stock ETF and a bond ETF side-by-side, then imagine how weights change when one outperforms for years.
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QuantRoutine provides educational content only. Nothing on this page is an offer, solicitation, or recommendation to buy or sell any security or to open an account with any specific broker. Investments can lose value, and past performance does not guarantee future results. You are responsible for your own investment, tax, and legal decisions. Always review current terms and fees on official websites.