By in Advanced Investing, Asset Allocation, Bond, Investing, Mutual Funds, Personal Finance, Stocks | 11 comments


Raise your had if you want an extra one quarter percent return on your portfolio every year? It takes about an hour and you can get this extra return every year. I know, it’s not much, but with interest rates in the basement, every little bit helps.

First, a bit of investing background.


“Don’t put all of your eggs in one basket.”

This old adage describes  the best way to boost investment returns. Diversify your investments among stock and bond index funds and you’ll cushion the volatility and boost returns. Imagine, over the last decade if you invested only stocks, your returns would have been in the low single digits. If you added some bonds to your portfolio, your investment returns go up a few percent.

Modern investing portfolio theory recommends determining your risk profile and then divvying up your portfolio in line with your risk level. In other words, if you can handle a bit more volatility in your investment returns, you want more stocks in your portfolio. Terrified of the cyclical ups and downs in your investment value, invest a greater percent in bonds.

Asset allocation is the investors personal decision about how to divide up your investments among basic asset classes. In general, investors divide their assets between stock and bond type investments. Younger folks, with more time until retirement and a longer working life frequently benefit from an asset allocation more heavily weighted toward stock investments. A guy in his 50’s facing retirement in fifteen years and risk averse, may choose 55% stock investments and 45% bond investments. A young woman with a high paying secure job and a high risk tolerance chooses 75% stock investments and only 25% bonds.

Following is an example of a moderately aggressive investment portfolio:

  • 33% in a broadly diversified United States stock index fund
  • 33% in a broad diversified International stock index fund
  • 34% in an inflation protected bond fund



A recent Wall Street Journal article reported that investors who regularly rebalance their investment portfolios increase their returns by 25% per year.

What is rebalancing?

Consider the portfolio above. The investor’s asset allocation is equally divided among three mutual funds. After one year, due to changes in value the portfolio looks like this:

  • 36% in a broadly diversified United States stock index fund
  • 26% in a broad diversified International stock index fund
  • 38% in an inflation protected bond fund

The USA stock market increased 9% so her US stock index fund increased to 36% of her overall portfolio. With the economic troubles in Europe, the international fund fell 23%. Finally, with the decline in market interest rates, the inflation protected bond fund increased in value 13% and grew to 38% of her investment portfolio. The goal of rebalancing is to return the proportion invested in each asset class to the investor’s original percentages; 33% in the two stock funds and 34% in the bond fund.

How to Rebalance?

There are several alternatives to rebalancing. The investor can simply sell off the assets which have increased above the target level and buy more of those that are beneath the target. In other words, the investor would buy more of the International stock index fund and sell of shares of the bond and US stock funds so that the percentages return to the original proportions.

Another option is to invest new monies into the asset class that is beneath the target. That way the International stock index fund would grow in percentage with relation to the total portfolio until returning to the desired allocation.

How Often to Rebalance?

Once or twice a year is enough to rebalance. It’s unnecessary to undergo rebalancing more frequently. The reason for rebalancing is to buy low and sell high. The investments that have fallen in value are bought (buy low) and those that appreciated are sold (sell high).

Personally, I check both my own portfolio and those that I manage several times per year, but rarely rebalance more than once per year. The research supports rebalancing once or twice a year to boost returns about 25%.

Is it worth an hour or so to increase returns by 25%?

How often do you rebalance? What are your investing thoughts?


  1. I usually review my asset allocation every December to see if I want to rebalance. Thanks for the reminder.


    November 26, 2012

  2. Interesting that you rebalance so infrequently @Barb and @Krant even more so! We will shortly be starting an investment campaign so I have been watching how people do it.


    November 27, 2012

  3. We typically rebalance once a year. I check in on it several times a year and usually only make changes annually. That’s a pretty good percentage, and knowing that it convinces me even more of the need to rebalance.

    John S @ Frugal Rules

    November 27, 2012

  4. @Krantc, John, and John, If you set up a simple portfolio populated with 2-4 index funds in your preferred asset allocation, management is so easy. And, your returns will beat the majority of actively managed mutual funds.


    November 27, 2012

  5. I admit I’ve never rebalanced, yet my funds have never gotten too many % points away from my ideal allocation. This is something I look at each year, but I’ve never pulled the trigger.

    Brent Pittman

    November 27, 2012

  6. @Brent-I’m glad you shared this information. If your percentages stay within a point or three of your initial allocation, no need to rebalance!!!


    November 27, 2012

  7. I totally concur Barb. Your point about risk is a key one in talking about rebalancing. I stress to my clients that we need to consider risk first and that is the main reason for asset allocation/rebalancing.

    Roger Wohlner

    November 27, 2012

  8. @Roger, I always appreciate your comments and insights. Your volatility is moderated with a well diversified portfolio.


    November 27, 2012

  9. Rebalancing is so important. Just because a fund did well this year doesn’t mean that it will be great next year and vice versa. By buying a less liked asset class you can buy more shares at a lower price.


    November 27, 2012

  10. Funny. When “Bloomberg” had a magazine they called rebalancing the toughest thing to do in investing….because you had to sell your “winner” and move the money to a “loser.” Just getting over that hurdle is difficult for most people, but as you show, totally worth it!


    November 28, 2012

  11. @Justin, Actually the research bears out the fact that in most cases, fund returns revert to the mean and winning funds usually underperform the next year.
    @Joe- It is really difficult-even for those who know the importance of rebalancing. And btw, Bloomberg still has a magazine; Now it’s called Bloomberg Businessweek (and it’s issues are piling up in a corner of my family room, no matter how fast I read :) )


    November 28, 2012


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