How often should I rebalance?

Once a year is enough for most portfolios; doing it more often adds costs and taxes with little benefit. ±5% bands are a good alternative if you prefer acting only when needed.

Does rebalancing improve returns?

Not necessarily: its job is keeping risk under control. In sideways or oscillating markets it tends to add; in long, strong trends it tends to subtract. You do it for discipline, not for performance.

How do I rebalance without selling?

By directing new contributions and collected dividends to the asset that has fallen behind. In Spanish fund portfolios you can also transfer between funds without triggering taxes.

Rebalancing | Wiki Por Dividendos

Rebalancing is the process of returning a portfolio to its target allocation after the market has pushed it away. If your plan was 60% stocks and 40% bonds and a good year in equities leaves you at 70/30, rebalancing means selling stocks or buying bonds until you are back at 60/40.

What it is for (and what it is not)

Rebalancing is first and foremost a risk-control tool: without it, the portfolio drifts towards whatever has risen most and you end up taking more risk than you decided. A 60/40 portfolio left alone through a long bull market can become 85/15 right before the next crisis.

What it is not: a formula for higher returns. Sometimes it adds performance (it systematically buys what is cheap and sells what is expensive) and sometimes it subtracts (in long trends, selling the winner is costly). Its value is keeping risk where you set it in your asset allocation.

Rebalancing

What it is for (and what it is not)

The two methods

How to rebalance without paying taxes

A numeric example

Frequently asked questions