Portfolio Rebalancing
The Vanguard Balanced Index Fund constantly maintains a 60/40 (stock/bond) mix; the equity portion is invested in the broad U.S. stock market, while the fixed-income part mimics the Barclays Aggregate Bond Index. For the 10-year period of 2002–2011, the fund averaged 7.04% a year, while a 60/40 mix that was never rebalanced returned 6.82% annually. The annualized difference (0.22%) between these two returns becomes even smaller once the impact of taxes are taken into account (from two sources: periodic rebalancing and the tax inefficiency of the bond portion).
According to 1990 Nobel Prize winner William Sharpe, a retired Stanford finance professor, “I don’t think there have been enough major cycles to say definitively that [rebalancing] will be a good thing in the future.” William Bernstein, investment manager of Efficient Frontier Advisors, believes that there is no reason to think that balancing monthly or on another frequent schedule is any better than doing it annually. He believes that rebalancing even once every two to three years is fine.