But the markets aren’t standing still. Over time, some asset classes outperform while others lag. During a bull market, stocks can rise sharply. Bonds can stabilize the portfolio in downturns. As these returns compound at different rates, the asset mix begins to deviate out of your original allocations.
A portfolio that’s 80% stocks can quietly develop into 85% or 90% stocks after a powerful rally. A difficult 12 months in stocks can push you more toward fixed income than you intended. Fluctuations in performance, good or bad, could cause your portfolio to deviate from the chance profile you originally chosen.
At some point the mixture not corresponds to your original plan. So do you have to intervene and restore balance?
You can get advice from major ETF providers. The answers aren’t at all times clear. For example, the Vanguard Growth ETF Portfolio (VGRO) states that its portfolio of 80% stocks and 20% bonds may be rebalanced on the subadvisor’s discretion. That leaves a number of room for interpretation.
Others are more prescriptive. The Hamilton Enhanced Mixed Asset ETF (MIX) uses 1.25x leverage with an allocation of 60% S&P 500, 20% Treasury and 20% Gold. Hamilton states that it’s going to routinely rebalance if the weights deviate from their targets by 2%. This is a narrow range and implies frequent change.
But you aren’t running a fund with institutional restrictions or leverage targets. You manage your individual portfolio. For most DIY investors, a less complicated approach works higher. Instead of reacting to each small market move, following a consistent, time-based rebalancing plan can reduce complexity and stop decision fatigue.
In today’s column, we’ll take a look at why it is best to rebalance, how different time-based approaches have performed prior to now, and why consistency is commonly more essential than perfect timing.
Why do you have to even rebalance your portfolio?
Rebalancing is the technique of selling assets which have grown beyond their goal weight and buying people who have fallen below their goal weight, bringing your portfolio back to its intended allocation.
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When you mix assets that are not perfectly correlated and periodically rebalance them back to focus on weights, you create what’s called a rebalancing premium. The underlying explanation has to do with how returns are composed.
The arithmetic return is the easy average of the annual or periodic returns. It treats each period independently. Geometric return is the typical growth rate of your money over time. It shows what you really earn after winnings and losses construct on one another.
The arithmetic average of returns doesn’t reflect the true investor experience. Investors live with the geometric return, which takes into consideration the results of compounding and the results of volatility.
Large fluctuations in portfolio value widen the gap between arithmetic and geometric returns. Combining assets with different correlations and rebalancing them can reduce overall volatility. This reduces this gap and improves the general result. An easy backtest illustrates this effect.
Source: testfolio.io
From April 2007 to February 2026, U.S. stocks returned 10.5% annually. US bonds returned 3.16% on an annual basis. If you just average these two numbers, you get 6.83%.
Now imagine a portfolio that’s 50% US stocks and 50% US bonds, rebalanced yearly. This portfolio returned 7.25% annually over the identical period. The difference between 7.25% and 6.83% of 0.42% per 12 months reflects the advantage of mixing and rebalancing the 2 asset classes reasonably than simply averaging their individual returns.
The improvement may also be seen in a risk-adjusted manner. The pure stock portfolio delivered a Sharpe ratio of 0.53. Bonds were delivered at 0.35. The annually rebalanced 50-50 portfolio achieved a Sharpe ratio of 0.62. Even though the raw return was lower than that of 100% stocks, it produced a better return per unit of risk taken.
