Rebalancing: Once/Year vs Never

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 what you originally chose, at the cost of tiny performance differences.
• The real benefit of rebalancing is risk control and behavior, not squeezing out an extra 0.2% of 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 see the same stock and bond returns each period.

The only difference is how they handle drift:

• Never Rebalance: Set 60/40 once, then let the weights drift as stocks and bonds move.
• Rebalance Annually: Once per year, reset back to 60% stocks / 40% bonds.

Data is modeled on a realistic but simplified 20-year path. Dividends and interest are reinvested. Fees and taxes ignored. This is about behavior, not an exact fund backtest.

Notes

• Both portfolios hold the same building blocks; there is no market timing or factor tilt beyond drift.
• We don’t add new contributions here; we just watch what happens to the same initial lump.
• In reality, taxes, transaction costs, and contribution schedules will affect the optimal rebalance rule.
• Educational only. Not personalized investment advice.

What the data says

In this kind of path, the “Never Rebalance” portfolio gradually drifts to a higher stock weight. That can give you a small edge in long-run growth when stocks outperform bonds, but it also means you end up holding more risk than you originally signed up for.

The annually rebalanced portfolio tends to lag slightly in peak performance but holds up a bit better in deep drawdowns, because you’re systematically trimming winners and adding to laggards back to 60/40.

The key is that the difference in CAGR is usually small. The bigger difference is how much equity you’re accidentally running late in the game if you never touch the mix.

When annual rebalancing makes sense

• You picked 60/40 (or any target) because that risk level actually matches your situation, not as a random default.
• You don’t want your portfolio quietly drifting to 80/20 or 90/10 without you noticing.
• You like having a calendar-based rule so you’re not making ad-hoc “gut” decisions.
• You care more about keeping risk under control than maximizing every last decimal of return.

When “set and drift” might be tolerable

• You start from a conservative allocation and are okay with drifting a bit more aggressive over time.
• You have a long horizon and very high risk tolerance.
• You use new contributions and withdrawals as “soft rebalancing” instead of explicit trades.
• You keep position sizes in check and aren’t letting single assets dominate the portfolio.

Even then, never rebalancing is still a choice about risk. If you don’t monitor the drift, you’re not “buy and hold,” you’re “buy and let the risk profile randomly change.”

Summary

Stylized values consistent with the chart. Real outcomes depend on the specific assets, period, and rebalance rules you use.