A 60/40 portfolio left alone since 1926 would have spent most of its life as an 84/16 one. Rebalancing is the act of putting it back, and the evidence says it is risk control, not a return source — once a year, or at a 5% drift, is about as good as it gets, and most of the rest is cost.
You chose a mix — say 60% stocks, 40% bonds — because it matched how much decline you could sit through. Then the markets moved and the mix moved with them. Rebalancing is selling some of what grew and buying some of what did not, to put the mix back where you chose it. It is one of the few portfolio decisions with clear evidence behind it, and the evidence says something most people do not expect: its job is to keep your risk where you set it, not to make you money, and doing it more often mostly costs more.
What happens if you never do it
Vanguard's 2010 study followed a 60/40 portfolio of U.S. stocks and bonds from 1926 to 2009. Left alone, it averaged 84% in stocks over the period, because stocks outgrew bonds and the portfolio drifted with them. Its annualized return was 9.1% — the highest of every policy tested — with annualized volatility of 14.4%, also the highest. The 2015 update's never-rebalanced 50/50 portfolio drifted at one point to 97% stocks. The 2022 paper's example is more recent: a 60/40 set up in 1989 and never touched "would have had 80% in equities at the end of 2021."
So the unrebalanced investor got more return and more risk, which is the same thing as saying they ended up holding a different portfolio from the one they chose — a far more aggressive one, arrived at by accident, usually at the top of a long bull market and therefore right before it mattered.
What rebalancing is for
The 2010 paper states it in one sentence: "The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation, rather than to maximize returns." The 2022 paper repeats it: rebalancing's primary function "is to keep portfolio risk in alignment with the investor's risk tolerance." Every rebalancing policy in the study gave up some return against never rebalancing (8.5% to 8.6% a year against 9.1%) and bought a lower volatility for it (around 12% against 14.4%). That is the trade. It is a good one for anyone who chose 60/40 for a reason, and no trade at all for someone who would be happy at 84/16 — in which case that is the allocation they should have chosen.
How often
This is where the evidence gets specific, and less work turns out to be better.
| Policy, 60/40, 1926–2009 | Average stock share | Annualized return | Volatility | Rebalancing events |
|---|---|---|---|---|
| Never rebalanced | 84.1% | 9.1% | 14.4% | 0 |
| Monthly | 60.1% | 8.5% | 12.1% | 1,008 |
| Quarterly | 60.2% | 8.6% | 12.2% | 335 |
| Annually | 60.5% | 8.6% | 11.9% | 83 |
| Annually, only if drifted 5% or more | 60.7% | 8.6% | 11.8% | 28 |
Read the right-hand columns together. Monthly rebalancing produced the same return and the same risk as annual rebalancing, through 1,008 events instead of 83 — each one a transaction, a spread, and in a taxable account a bill. Checking once a year and acting only when the mix had drifted five percentage points from target did the job in 28 events over 84 years. Vanguard's conclusion: "annual or semiannual monitoring, with rebalancing at 5% thresholds, is likely to produce a reasonable balance between risk control and cost minimization." The 2022 paper, with a formal cost model, lands in the same place — "annual rebalancing hits the sweet spot" — and adds a warning worth remembering: trading costs "can increase tenfold during periods of market turmoil," which is exactly when a tight schedule forces the most trades.
Gobind Daryanani's 2008 study put a sharper edge on the same idea from the practitioner's side: watch the portfolio often, every couple of weeks, but act only when an asset has drifted 20% from its target weight — the 60% stock allocation becomes a trade only outside 48% to 72% — and then trade only partway back toward the target rather than all the way. Over 1992–2004 that policy beat the same bands checked once a year by about 22 basis points a year, with "an average of two to three trades a year." His line for it: "Look frequently and trade less."
The bonus, and why it is small
There is a return effect, and it is worth understanding so that it does not get oversold. Two assets that do not move together, rebalanced between, earn a little more than the average of their returns, because rebalancing systematically sells the one that has just risen and buys the one that has just fallen. William Bernstein named it the rebalancing bonus in 1996 and gave the formula: it grows with the assets' volatility and shrinks with their correlation. For a 50/50 mix of U.S. stocks and corporate bonds from 1926 to 1994 he put it at 0.49% a year. Between volatile, weakly correlated markets it can be larger; between stocks and bonds it is a few tenths of a percent, which is real and which no one should reorganize their life around. The bonus is the consolation prize. Risk control is the point.
Taxes and costs
Rebalancing in a taxable account means realizing gains on the winner, which is why the first rule is to do as much of it as possible where it is free. Fidelity's guide: "Rebalancing within a tax-advantaged account does not generate tax consequences," and new contributions can "restore your targeted allocations without selling any positions." Vanguard's version is the same — direct dividends, interest and new money to whatever is underweight before selling anything, and do the selling inside retirement accounts where you can. The 2010 paper's own view of the taxable case: "annual rebalancing is likely to be preferred when taxes or substantial time/costs are involved."
The short version
Rebalancing keeps the portfolio you chose from quietly becoming a riskier one. Once a year, or whenever the mix has drifted about five points, is as good as any schedule the evidence has found; more often adds trades, not safety. There is a small return bonus, a few tenths of a percent between stocks and bonds, which is nice and not the reason. And in a taxable account the cheapest rebalancing is the kind that never sells: new money and dividends pointed at whatever has fallen behind.
What this has to do with a trading desk: a sizing discipline is the same idea at a different speed — the desk's systems hold the risk per trade constant and let the position size move, rather than letting a winning stretch quietly grow the bet. Position sizing from the stop is that rule.
- Best practices for portfolio rebalancing — Jaconetti, Kinniry and Zilbering, Vanguard Research, July 2010 (hosted copy)
- Best practices for portfolio rebalancing, 2015 update — Zilbering, Jaconetti and Kinniry, Vanguard Research, November 2015 (hosted copy)
- Rational rebalancing — an analytical approach to multiasset portfolio rebalancing decisions and insights — Zhang, Ahluwalia, Ying, Rabinovich and Geysen, Vanguard, October 2022
- The rebalancing bonus — theory and practice — William J. Bernstein, Efficient Frontier, 1996
- Opportunistic rebalancing — a new paradigm for wealth managers — Gobind Daryanani, Journal of Financial Planning, January 2008
- Rebalancing your portfolio — Fidelity, May 2026
- Managing your accounts to lower taxes — Vanguard
Education, not advice. Nothing on this page recommends buying or selling anything, and nothing is a promise of results — every figure is cited above or hypothetical. TOTH does not provide investment advice. New to the vocabulary? The glossary has plain definitions.