When and How to Rebalance for Optimal Returns
By implementing a disciplined rebalancing strategy, investors can maintain control, lock in gains, and reduce exposure to unwanted risks. Ron McCoy and Freedom Capital Advisors are ready to help design a personalized rebalancing plan that aligns with your financial goals.
Portfolio rebalancing is one of the most important—but often overlooked—steps in managing long-term wealth. High-net-worth investors aiming for steady growth and smart risk management need to pay attention not just to rebalancing itself, but also to when and how it’s done. Disciplined, tactical rebalancing is a mark of effective wealth management.
What Is Portfolio Rebalancing?
Rebalancing means bringing your portfolio’s mix of assets back in line with your targets after the market moves. For example, a 70/30 stock-bond portfolio can shift to 80/20 after a bull market, raising your risk more than you intended. Rebalancing helps lock in gains from outperformers and redirects capital to lagging assets, keeping your risk in check.
Source: Morningstar – The Power of Portfolio Rebalancing
Why Rebalancing Matters
If you neglect rebalancing, you risk becoming overexposed to the hottest sectors or missing out on recovery in undervalued areas. Vanguard studies show that disciplined rebalancing can add 0.35%–0.60% to annual returns while keeping volatility under control.
Case Study: Staying Balanced in a Bull Market
A $5M 60/40 portfolio drifted to 75% equities after a strong market run. By rebalancing back to 60/40, the investor locked in gains and trimmed risk just before a correction, preserving nearly $400,000 more than if they’d left it alone.
Best Practices for Precision Rebalancing
- Calendar-Based Rebalancing: Set regular (quarterly or annual) checkpoints for rebalancing. This approach brings consistency and is easy to automate.
- Threshold-Based Rebalancing: Trigger rebalancing when allocations drift more than 5% from your targets. This can improve risk-adjusted returns by responding directly to market moves.
- Opportunistic Rebalancing: In volatile markets, don’t wait for the calendar—act when opportunities or big drifts appear.
Actionable Tips for Investors
- Use Tax-Advantaged Accounts: Rebalance within IRAs or 401(k)s to avoid triggering immediate taxes.
- Coordinate With Dividends: Reinvest dividends or interest payments to help rebalance naturally—this can reduce the need to buy or sell.
- Monitor Correlations: Review how your assets move in relation to each other and adjust your targets if correlations shift.
Expert Perspective
Regular, disciplined rebalancing can help you lock in gains, reduce risk, and keep your financial plan on track—even when markets are unpredictable. A proactive approach to rebalancing is a powerful tool for long-term wealth.
