ITA Wealth Management

How frequently should one rebalance a portfolio? David Swensen does it every day with the Yale endowment fund, but that is an exception. Bernstein recommends no more than once a year and it does not hurt to let asset classes run longer. Arnott, on page 40 of his book recommends rebalancing annually.

“The annual rebalance ensures discipline and avoids the return-chasing behavior inherent in traditional cap-weighted indexes. Outperformers are rebalanced back to their economic size, with the proceeds invested in shares that have recently fared poorly relative to their operating results.”

From studies done on the eight asset classes for which I have 18 years of data, the optimum rebalancing takes place when an asset class exceeds the target by +/- 35%. From experience, rebalancing can almost always be accomplished by reinvesting dividends in asset classes that are under target. It is even easier for investors who continue to add new money to the portfolio each month. Just keep purchasing shares that are under the target percentage.

Lowell Herr

Photograph: Look closely and you will see a “Snake Bird” as it looks like a snake when it is swimming. It was drying its feathers when this photo was taken. Image by Dennis Dean