The Case for Never Rebalancing

Rebalancing is one of those pieces of financial advice that nobody questions. Every book, every advisor, every target-date fund: rebalance annually. Sell what went up. Buy what went down. Return your portfolio to its target allocation. This is presented as the responsible, disciplined, adult thing to do.

But here's the uncomfortable truth: rebalancing almost always reduces long-term returns. It doesn't control risk as effectively as advertised. And the behavioral demands of selling winners to buy losers are far more punishing than the literature acknowledges.

The contrarian case against rebalancing isn't fringe. It's supported by basic arithmetic and a century of market data. Let's walk through it.

The Arithmetic Is Brutal

The standard rebalancing framework assumes you have a target allocation — say, 60% stocks and 40% bonds. Once a year, you sell whichever asset has gone up proportionally and buy whichever one has gone down, restoring the 60/40 split.

The problem: stocks return more than bonds. Significantly more. Over the last century, US stocks returned roughly 10% annually versus roughly 5% for bonds. That's not a close call — it's a 2x difference in annual return.

If you rebalance annually, you are systematically selling the asset with higher expected returns (stocks) to buy the asset with lower expected returns (bonds). Every. Single. Year.

The math of this is straightforward. Imagine you start with a 60/40 portfolio in 1980 and never rebalance. By 2020, your allocation would be roughly 95% stocks and 5% bonds — and your total portfolio value would be dramatically higher than if you'd rebalanced annually because you let the higher-returning asset compound uninterrupted.

Vanguard studied this exact question and found that a never-rebalanced 60/40 portfolio starting in 1926 would have produced significantly higher terminal wealth than one rebalanced monthly, quarterly, or annually. The rebalanced portfolio had lower volatility along the way. But the terminal difference was enormous — on the order of 50% more wealth by never rebalancing.

Rebalancing trades returns for reduced volatility. That trade might be worth making, but you should understand that you're making it.

Where Rebalancing Actually Helps

The case for rebalancing rests on two pillars, and only one of them is supported by evidence.

Risk control (legitimate)

A portfolio that drifts from 60/40 to 95/5 over 40 years has become a fundamentally different portfolio. The risk profile is unrecognizable. If you're 65 years old, a 95% equity portfolio is wildly inappropriate for your life stage.

Rebalancing forces you to maintain the risk profile you chose. This is important — especially as you approach retirement, when a large equity allocation exposes you to sequence of return risk.

But here's the nuance: rebalancing controls risk, but it doesn't meaningfully reduce the maximum drawdown of a portfolio. The 2008 financial crisis hit a 60/40 portfolio almost as hard (down 21%) as a 70/30 (down 26%), and a 50/50 was still down 16%. The difference between a disciplined rebalancer and a neglectful non-rebalancer during the worst moments of a crisis is smaller than the industry suggests.

Rebalancing bonus (questionable)

The rebalancing bonus is the idea that selling high and buying low systematically adds return beyond what the underlying assets produce. The theory: when stocks crash and bonds rally, selling bonds to buy cheap stocks captures the recovery, generating a return boost.

The evidence for a meaningful rebalancing bonus is thin. Yes, rebalancing during 2008 by selling bonds (up 5%) to buy stocks (down 38%) added value. But in most years, rebalancing means selling stocks (which usually go up) to buy bonds (which usually go sideways) — a return drag, not a boost. Over long periods, rebalancing slightly reduces returns on average, with occasional spikes of outperformance during extreme market dislocations.

The Better Way: Rebalance With Contributions

Here's the insight that reframes the entire rebalancing debate: you don't need to sell to rebalance.

If you're in the accumulation phase (still working, still saving), you can rebalance entirely through new contributions. Every month, send your new investment dollars to the asset class that's underweight. Stocks have run up? Your next few contributions go to bonds. Bonds have lagged? Next contributions go to stocks.

This approach has several advantages:

• No capital gains taxes. Selling appreciated assets triggers taxable events. Buying with new money doesn't.
• No transaction costs. Even in an era of zero commissions, bid-ask spreads and market impact matter at scale.
• No psychological friction. It's psychologically easier to buy more of an underperformer (you're getting a bargain!) than to sell a winner to buy a loser.
• No momentum fighting. You're not selling into strength, just reducing the pace at which you buy it.

For most accumulators, contributions alone can maintain a target allocation within reasonable bands. If your target is 70/30 and you're at 73/27, redirecting contributions for a few months solves the problem without a single sale.

When Selling for Rebalancing Makes Sense

Contribution-based rebalancing works until it doesn't. When your portfolio is large relative to your contributions, new money can't move the needle. A $1 million portfolio with $20,000 in annual contributions drifting 5% off target — that's a $50,000 gap against $20,000 in new money. You need to sell.

A reasonable rule of thumb: rebalance only when allocations drift more than 10 percentage points from the target. A 60/40 that has drifted to 70/30 requires a trim. A 60/40 that's drifted to 63/37? Redirect contributions and leave it alone.

This "wide-band" approach captures most of the risk-control benefit of rebalancing while avoiding most of the return drag. Studies suggest that rebalancing bands of 5–10% (absolute, not relative) provide the best balance of risk control and return preservation.

The Rebalancing You Should Actually Do

Let me be clear: I am not telling you to sell all your bonds and go 100% equities. The terminal-wealth argument for never rebalancing works brilliantly in a spreadsheet where volatility doesn't matter and panic doesn't exist. Real investors live in a world where 50% drawdowns cause divorce, insomnia, and catastrophic financial decisions.

The case for never rebalancing is really a case for rebalancing less. Use contribution-based rebalancing as long as you can. Apply wide bands (5–10% absolute drift) before selling. Rebalance in tax-advantaged accounts whenever possible to avoid taxable events. And understand that rebalancing is a risk management tool — not a return enhancer.

The financial industry loves annual rebalancing because it creates activity, which creates fees, which creates the appearance of value. But activity is not the same as value, and the best rebalancing strategy for most people is the one they do the least.

Rebalance with new money first. Sell only when allocations drift beyond 10% of target. And remember: the best portfolio isn't the one that was perfectly balanced every year — it's the one you actually held through the volatility that rebalancing was supposed to solve.