How Often Should You Rebalance Your Portfolio?

Rebalancing is often seen as one of the cornerstones of prudent investing. By restoring a portfolio to its intended asset allocation, investors aim to keep risk in check and maintain alignment with long-term goals. But how frequently should this be done? Should investors rebalance monthly, quarterly, or annually? What about professional fund managers—do they follow the same rules? And intriguingly, what if rebalancing actually reduces returns?

Jeremy Siegel’s research into the S&P 500 raises precisely this question. His findings suggest that not rebalancing—at least in certain contexts—can lead to better outcomes. In this post, we’ll explore different approaches to rebalancing, what fund managers do, and whether less intervention might actually be more.

What Is Rebalancing?

Rebalancing is the process of bringing a portfolio back to its target asset allocation. For instance, if an investor wants a 60/40 equity/bond split and equities outperform, that allocation might shift to 70/30. Rebalancing involves selling some equities and buying bonds to return to the original target.

This process is designed to control risk, ensuring that a portfolio does not become overly concentrated in high-performing (and possibly riskier) assets. It also encourages a discipline of ‘selling high and buying low’.

How Often Should You Rebalance?

There is no universal rule. Common approaches include:

• Time-based rebalancing: rebalancing at regular intervals (e.g. annually or quarterly).

• Threshold-based rebalancing: only adjusting when asset weights deviate by a set percentage (e.g. ±5%) from the target allocation.

• Hybrid strategies: combining both timing and thresholds for added flexibility.

Annual rebalancing is popular among long-term investors because it is simple, cost-effective, and reduces the temptation to tinker with portfolios too frequently. However, more frequent rebalancing may be justified in volatile markets or where large cashflows are involved.

What Do Fund Managers Do?

Professional fund managers tend to rebalance more dynamically. In multi-asset funds, managers may rebalance daily or weekly to accommodate market movements, inflows, and risk constraints. Many institutional investors also operate under strict mandates that specify target allocations and tolerances.

However, frequent rebalancing can lead to excessive trading costs and tax inefficiencies (in taxable accounts). Active managers may also allow temporary deviations if they hold tactical views or wish to capture momentum. As with individuals, there is no one-size-fits-all approach.

The Case for Not Rebalancing

While rebalancing is a standard practice, Jeremy Siegel’s research offers a provocative counterpoint. In Stocks for the Long Run and related academic work, Siegel examined a hypothetical version of the S&P 500 in which the original 500 firms selected in 1957 were never replaced or rebalanced. The portfolio simply held these companies in their initial weights, allowing natural growth and decline.

Surprisingly, this ‘frozen’ S&P 500 outperformed the actual, regularly maintained S&P 500 index from the early 1980s onward (Siegel and Schwartz 2006). Why? Because the real index periodically trims or replaces companies based on size and eligibility. As a result, it reduces exposure to some of the best long-term performers—such as Apple, Microsoft, and Amazon. In contrast, the unrebalanced version let the winners run and compound for decades, dominating the portfolio and driving superior returns.

This finding challenges the assumption that rebalancing always leads to better outcomes. In fact, by systematically selling winners, rebalancing may suppress long-term returns—especially when those winners go on to deliver extraordinary performance.

Figure 1. The chart illustrates the hypothetical growth of $1 invested in the S&P 500 from 1957 to 2024 under two scenarios: one in which the portfolio is rebalanced periodically (as in the real S&P 500), and another in which the original 500 stocks are held without any rebalancing or replacements. The unrebalanced portfolio significantly outperforms over the long term due to the compounding effect of a small number of dominant winners. This supports findings by Jeremy Siegel and Jeremy Schwartz that rebalancing can, in some cases, reduce long-term returns by trimming exposure to top performers.

Adapted from: Siegel, Jeremy J., and Jeremy D. Schwartz. 2006. ‘The Long-Term Returns on the Original S&P 500 Firms’. Financial Analysts Journal 62 (1): 18–31.

A Trade-Off: Risk vs Reward

So should you abandon rebalancing altogether? Probably not.

While unrebalanced portfolios may achieve higher returns in some cases, they also carry significantly higher risk. A portfolio allowed to drift may become overwhelmingly tilted toward equities or individual stocks, increasing volatility and drawdown risk. For most investors, especially those nearing retirement or relying on capital preservation, this is an unacceptable trade-off.

That said, these findings invite investors to reconsider how often they rebalance. If your financial goals allow for higher volatility, you may not need to rebalance as frequently as you think.

A Pragmatic Approach

Most individual investors may find that annual or semi-annual rebalancing provides a good balance between discipline, cost control, and simplicity. For those with taxable accounts, rebalancing through contributions, withdrawals, or dividends can help maintain allocations without triggering capital gains.

For professionals, rebalancing frequency depends on mandate, portfolio size, cashflows, and operational constraints. But even here, there is growing awareness that overly rigid rebalancing may not always serve investors best.

Conclusion

Rebalancing is a useful risk management tool—but it’s not infallible. While periodic rebalancing helps maintain diversification and discipline, it may also come at a cost: missed opportunities from letting winners run.

Jeremy Siegel’s research reminds us that sometimes, doing less can achieve more. Investors would be wise to think critically about their own objectives, time horizons, and risk tolerance before settling on a rebalancing strategy. In some cases, a lighter touch may be the smarter move.

References

Siegel, Jeremy J. 2014. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. 5th ed. New York: McGraw-Hill Education.

Siegel, Jeremy J., and Jeremy D. Schwartz. 2006. ‘The Long-Term Returns on the Original S&P 500 Firms’. Financial Analysts Journal 62 (1): 18–31. https://doi.org/10.2469/faj.v62.n1.4076.