What’s the right way to rebalance a portfolio?

Nice brief article from Monevator on portfolio rebalancing:

What’s the right way to rebalance a portfolio is a question often asked and about as simple to answer as what’s the right way to end a relationship – the results vary according to circumstance and personal style.

A number of different portfolio rebalancing methods exist, but there’s no clear-cut evidence that there is one system to rule them all.

Research by the respected fund shop Dimensional Fund Advisors concludes:

There is no easy one-size-fits-all rebalancing solution. Rebalancing decisions should be driven by the need to maintain an allocation with a risk and return profile appropriate for each investor. The optimal rebalancing strategy will differ for each investor, depending on their unique sensitivities to deviations from the target allocation, transaction frequency, and tax costs.

When it comes to rebalancing, like so many things in life, it’s doing it that counts, not exactly how you do it.

Read the full article here.

I’m a fan of keeping it simple. Excessive rebalancing complicates your taxation situation and drives up investment costs. Rebalancing every year or so if the portfolio mix has materially changed seems sensible.