Rebalancing is Even More Important Than You Think

People are often surprised when I tell them that I’m a market timer. I’m a strong believer in rebalancing one's portfolio periodically. While the primary purpose is to control risk, rebalancing can also boost return.

Let’s look at how it worked this year and, far more importantly, over the past quarter century. 

Below are the three broadest exchange-traded funds and their year-to-date returns through June 4, 2025, per Morningstar Data.

As we all know, it’s been a bumpy ride for stocks. Morningstar reports the following year-to-date total returns (including dividends reinvested) through June 3, 2025. 

VTI, VXUS, BND Performance—Source: Morningstar Data

Looking at U.S. stocks, VTI was up 4.6% on February 19 and then quickly gave up 20.2 percentage points to bottom out down 15.6% for the year.

Going into the year, not many people wanted to rebalance with VTI gaining 26.1% in 2023 and 23.8% in 2024. I urged people to imagine the pain of a market plunge back in late January. Just 10 weeks later, it was a lot easier to imagine the pain, but it was too late. Rebalancing meant you then had to buy. 

Buying to rebalance was especially hard given the volatility and old adage to sell in May and go away through October. 

Rebalancing: A Longer View

The above proves absolutely nothing, however, as the time period is far too short. So let’s look at the last 25 years.

Though these three ETFs weren’t around at the end of 1999, the mutual fund share classes were. I’ve been tracking and investing in the three-fund portfolio even longer than that. 

I took a moderate portfolio of 40% U.S. stocks, 20% international stocks and 40% total bond funds, and compared a buy-and-hold to one that rebalanced twice a year. The rebalancing dates were June 30 and December 31, or the last trading day before if markets were closed that day. From December 31, 1999, through the end of 2024, the results were as follows:

It may appear that rebalancing added only seven basis points to the return column, but you want to look instead at a risk-adjusted return. The buy-and-hold method ended the 25-year period with a very risky 78% stocks, while the rebalanced portfolio stayed at a constant 60%. 

Thus, the simple average (beginning and ending value) of the buy-and-hold method was 69% stocks. The rebalanced portfolio outperformed with less risk.

Conclusion

Logically, we all know rebalancing works. We’ve seen data like the Mind The Gap study from Morningstar that demonstrated investors give up 15% of their returns by chasing performance. Yet we all think it’s someone else buying high and selling low.

Rebalancing is simple, but it’s not easy. Warren Buffet put it best when he said, “Be fearful when others are greedy and greedy only when others are fearful.”

Now there are no guarantees rebalancing will work, even in the long run. Almost no one expected stocks to recover so quickly in April. 2020 was also puzzling. U.S. stocks lost 35% in the 33 days ending on March 23, 2020, as Covid-19 hit, but VTI ended up 21% that year for reasons I can’t explain. Bear markets can last far longer than what I call the Teddy bears we have had since the year 2000.

Still, I’m betting that human nature to chase performance will continue. Investors will be predictably irrational. It hurts to buy in a bear market and sell in a bull. But pain is typically a sign you are doing something right, and pleasure is a sign you are doing something wrong.

Though I’m no Warren Buffett, I paraphrase his philosophy above and tell people, “Feel pain when others feel pleasure and pleasure when others feel pain.” It turns out it’s better to buy low and sell high, which seems obvious, yet few investors have the intestinal fortitude to actually do it.

Do you?