The Upsides of Rebalancing

Rebalancing is one of the least exciting parts of investing, which is exactly why it works. It does not rely on forecasts, predictions, or clever timing. It relies on discipline. Rebalancing is the process of bringing a portfolio back to its intended allocation after markets have moved. Over time, this simple habit can quietly improve results while reducing risk.

Portfolios do not stay balanced on their own. When markets rise or fall, certain assets grow faster than others. Stocks may outperform bonds for several years, or one sector may surge while another lags. Without intervention, this drift changes the risk profile of a portfolio. What started as a balanced strategy can slowly turn into something far more aggressive or far more conservative than intended.

The danger is that this shift often goes unnoticed. A portfolio that has benefited from strong market performance can feel safer because the account balance is higher. In reality, the underlying risk may have increased. Rebalancing corrects this by trimming assets that have grown beyond their target weight and adding to those that have fallen behind.

What makes rebalancing difficult is that it feels counterintuitive. It asks you to sell assets that have performed well and buy assets that have disappointed. Emotionally, this feels wrong. Strong performers feel safe. Weak performers feel risky. Rebalancing ignores recent performance and focuses on structure instead of stories.

This discipline creates a natural buy low, sell high behavior without requiring you to identify market tops or bottoms. You are not guessing when an asset has peaked. You are responding to how far it has moved relative to your plan. Over long periods, this process can reduce volatility and smooth returns, even if it occasionally feels uncomfortable in the moment.

Rebalancing also plays a key role in risk management. When equity markets rally for extended periods, portfolios can become more exposed to downturns than intended. A sudden market drop then causes more damage than the investor expected. Regular rebalancing helps prevent risk creep by keeping exposure aligned with what the investor can realistically tolerate.

Another benefit is behavioral. Clear rebalancing rules reduce decision fatigue. Instead of constantly wondering whether to make changes, you follow a predefined process. This removes emotion from moments when markets are noisy and opinions are loud. Structure replaces impulse.

There are different ways to rebalance. Some investors use time-based approaches, such as reviewing allocations annually. Others use threshold-based rules, rebalancing only when an asset class drifts beyond a set range. The method matters less than the consistency. The goal is not perfection. The goal is to maintain alignment over time.

Taxes and costs should be considered, especially in taxable accounts. Rebalancing does not mean unnecessary trading. It means thoughtful adjustments that respect tax efficiency and transaction costs. Sometimes rebalancing can be achieved by directing new contributions toward underweighted assets rather than selling existing positions.

Rebalancing is not about maximizing short-term performance. In some years, letting winners run would produce higher returns. The purpose is to control risk and increase the probability of sticking with the plan over decades. Investing success is rarely about squeezing out every last percentage point. It is about staying invested through cycles without abandoning strategy.

One of the most common mistakes is ignoring rebalancing altogether or reacting only after large market moves. By then, emotions are already elevated. A disciplined rebalancing process works best when it is boring and expected.

Doing less often leads to better outcomes. Rebalancing is a reminder that investing is not about constant action. It is about maintaining balance while markets do what they do. Over time, this quiet discipline can make a meaningful difference.

Write to Marck Berotte at mberotte@aglaosconsulting.com