Rebalance on a schedule, not on emotion

Return to your target allocation at a set interval or threshold — not because the market moved you.

Why it works

Drift in a portfolio — as some assets outperform others — slowly transforms the risk profile without any active decision. Scheduled rebalancing systematically sells high and buys low, reversing the momentum that emotion-driven investors chase in the wrong direction. Threshold-based rebalancing (rebalance when an asset class drifts 5 percentage points from target) is more tax-efficient than calendar rebalancing because it trades less frequently.

How to do it

1. Set a target allocation (e.g., 90% equities, 10% bonds) that matches your time horizon and risk tolerance.
2. Check allocation quarterly; rebalance only when any asset class is more than 5 percentage points from target.
3. Rebalance preferably by directing new contributions toward underweight assets before selling overweight ones.

Evidence

Vanguard and academic research consistently finds that rebalanced portfolios maintain intended risk exposure over time; portfolios that are never rebalanced drift toward overweight equities and experience larger drawdowns than intended, creating behavioral panic during downturns. (observational)

Optimal rebalancing frequency is context-dependent (tax situation, contribution rate, time horizon); the finding that some form of disciplined rebalancing outperforms none is robust.

Sources

• Vanguard Research (2019), Rebalancing and Its Alternatives

Common mistake

Rebalancing based on which asset class "has done better" recently — a form of momentum chasing that buys high and sells low, the opposite of what rebalancing is supposed to accomplish.