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Time to rebalance?

By Sheyna Steiner ·
Wednesday, November 23, 2011
Posted: 1 pm ET

The long holiday weekend may be a good time to do some financial housekeeping, and that might include rebalancing your investment portfolio if it's in a tax-advantaged account such as a 401(k) or IRA.

Rebalancing means resetting your investments to match your original asset allocation plan.

For instance, imagine a hypothetical scenario in which someone has invested 25 percent in large-cap stock mutual funds, 25 percent in small-cap stock mutual funds, 25 percent in mid-cap and then 25 percent in international stock funds. If one asset class decreased by 10 percent and another asset class increased by 10 percent, they would sell some of the mutual fund that had increased and buy more of the fund that decreased in order to get back to their original allocation.

Some people like to rebalance when their allocation skews further than a certain threshold, others rely on the calendar and still others do it when they happen to remember.

There's not necessarily one right answer as to how frequently rebalancing should be done, though it can be done too often. While rebalancing has been shown to increase returns over time and reduce risk, too-frequent rebalancing can have the opposite effect.

In a post titled, "Case studies in rebalancing" on his website,, William Bernstein, modern portfolio theory advocate and author of "The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between," concludes that:

  • Monthly rebalancing is too frequent.
  • There are small rewards to increasing one's rebalancing frequency from quarterly up to several years, but this comes at the price of increased portfolio risk.

You makes your choice and you takes your chances, but don't sweat this one too much. The returns differences among various rebalancing strategies are quite small in the long run.

If it's been a while since you've thought about it, this weekend may be a good time to take a look at your allocation.

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