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Concept · Asset allocation

What is rebalancing?

Direct answer Selling what has grown past its target weight and buying what has fallen below it, so the portfolio returns to its chosen mix. Done on a schedule (once a year on this site) or when a weight drifts past a band. It keeps the risk where it was set and, in a taxable account, realizes gains each time.

The three books on the Asset allocation page rebalance each January. Monthly rebalancing of the same books changed the return by 0.0 to 0.2 points a year, moved the worst fall by about a point, and turned over 12 to 14% of the book a year instead of 4 to 5%. In a taxable account the difference is realized gains, which is Implement’s subject.

One sleeve is the exception: a bitcoin sleeve rebalanced once a year drifted from 3% to about 10% inside 2020, so a cap on it holds only with its own band or a monthly schedule.

Sources

  1. Vanguard, 'Rational rebalancing', 2022corporate.vanguard.com

Used in

60/40 is the floor, and three books clear it from both starts Three books of stocks, Treasuries and gold returned more per unit of risk than 60/40 from a 2006 start and a 2010 start, and lost less in 2022. The return gap depends on the start; the edge does not. Bitcoin is sized by the loss a household can hold, not by the optimizer Three percent of bitcoin added two points a year to the Grow wealth book since 2016 for a worst fall a third of a point deeper. The optimizer wants 69%. Once a year cannot hold the cap. Gold is a view on the decade, not a backtest result Gold held in 2008 and 2022 and sits at 15 to 30% in the optimizer's answer from a 2006 start and a 2010 start. It also lost 62% from 1980 to 1999. Its weight is a view on the next decade.

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