Does It Always Make Sense to Rebalance Your Portfolio?
When investors hear the term “rebalancing,” it often comes with an air of responsibility — like changing the oil in your car or getting a routine checkup. The idea is simple: over time, some investments grow faster than others, and rebalancing puts your portfolio back in line with your original plan. But does rebalancing your portfolio always make sense?
The answer, like most things in investing, depends on your goals, your time horizon and the type of portfolio you’re managing.
The Case for Rebalancing: Staying True to Your Strategy
At its core, rebalancing is about risk management. Imagine your target allocation is 60% stocks and 40% bonds. After a strong year in the stock market, that mix might drift to 70/30. You’re now taking more risk than you originally planned.
Rebalancing brings you back to your intended asset allocation — effectively “selling high” on the outperforming asset and “buying low” on the laggard. Over time, this discipline can prevent emotional investing and help smooth returns through different market cycles.
Historical research supports this fact: portfolios that are periodically rebalanced (annually or semiannually) tend to maintain more consistent risk levels than those left unchecked.
The Counterpoint: Sometimes Letting Winners Run Makes Sense
While rebalancing has its benefits, it’s also true that not every investor needs to rebalance on a strict schedule. There’s a valid argument that rebalancing too often can hurt returns — especially in long bull markets.
For example, investors who rebalanced aggressively during the 2010–2020 stock rally may have repeatedly trimmed growing equity positions, missing out on compounding gains. In that case, “buy and hold” investors with higher stock exposure were rewarded for their patience.
Moreover, rebalancing can incur costs. If you’re working in a taxable account, trimming appreciated assets may trigger capital gains. Even in tax-deferred accounts, frequent trading can generate transaction fees and administrative drag.
A flexible approach — rebalancing only when allocations drift more than 5–10% from target — can sometimes strike the right balance between discipline and opportunity.
Looking Inside: Rebalancing Individual Stock Holdings
There’s also the question of rebalancing within a stock portfolio. Should you trim winners like Apple or Microsoft if they’ve grown to dominate your holdings?
Again, context is key. Concentration in a few strong companies can drive higher returns, but it also raises risk. A portfolio where one stock makes up 30% of total value can experience large swings based on that company’s performance.
Investors should ask: has the position grown due to fundamentals, or is it simply a product of market exuberance? If the business case remains solid, there may be no immediate need to rebalance. But if the valuation has become stretched — or your comfort with volatility has changed — it could be wise to take some gains off the table.
The Bottom Line
Rebalancing isn’t a one-size-fits-all rule. It’s a tool — and like any tool, its effectiveness depends on how it’s used. For disciplined investors seeking consistent risk exposure, periodic rebalancing (annually or by threshold) is essential. For growth-oriented investors comfortable with some volatility, allowing allocations to drift within reason may enhance long-term returns. For concentrated stock portfolios, rebalancing decisions should weigh fundamentals, valuation and personal risk tolerance.
In short, rebalancing makes the most sense when it aligns with your overall strategy — not just because the calendar says it’s time.
Any opinions are those of Southern Springs Capital Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
As Financial Advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Southern Springs Capital Group is not a registered broker/dealer and is independent of Raymond James Financial Services.
David Jackson, MBA, CFP®, C(K)P™, is the Managing Partner at the Southern Springs Capital Group. For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4585.
