What Is the Optimal Portfolio Rebalancing Strategy?
- RetirementGuy
- May 15
- 1 min read
Portfolio rebalancing is the practice of realigning a portfolio’s allocation to the allocation percentages originally chosen by an advisor and their client (i.e. the target allocation). This is done by reducing positions that have become an outsized percentage of the portfolio (due to relative outperformance) while increasing positions that have become a smaller part of the portfolio (due to relative underperformance). In doing so, investment managers ensure that the portfolio’s allocation matches their client’s stated risk tolerance.
Unfortunately, this can create a problem. While rebalancing can reduce risk, it can also harm long-term performance. This is true because rebalancing tends to move money out of assets that are outperforming (on a relative basis) and into assets that are underperforming (on a relative basis). As a result, the more frequently you rebalance a portfolio, the more it tends to underperform, all else equal.
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