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Does rebalancing your portfolio annually create additional return potential and lower volatility versus never rebalancing?
Investing is the ultimate exercise in patience. Historically, major equity and bond markets have delivered positive returns for investors who use a patient, long-term strategy. However, to realize those potential long-term benefits, investors often have to navigate through periods of short-term uncertainties.
An undisciplined approach to trading decisions, particularly during volatile market conditions, can negatively impact performance and make for a difficult investing experience.
However, rebalancing your portfolio annually may create additional return potential and lower volatility versus never rebalancing.
For a long-term investor, patience and risk management are key qualities. But patience is different than inattention. Maintaining a mix of investments that deliver returns and manage risk requires timely adjustments, since, over time, there are three common occurrences that can shift a portfolio away from its initial asset allocation.
A key to addressing these issues is an annual rebalance of your portfolio. Rebalancing portfolios annually may not only generate additional return potential, it can lower volatility versus never rebalancing.
Over the very long term, and with a yearly rebalancing regime, recent work2 has shown how volatility can be “harvested” to help build wealth. The interactive chart below shows two long-term constructions of domestic stock and bond portfolios of different mixes. If you look at their values after 20-plus years, you’ll see that the rebalanced version has significantly outperformed the version that was not rebalanced. In addition, a 60% stocks/40% bonds portfolio rebalanced annually has actually outperformed a static 100% stock portfolio.
Regular Rebalancing Has Historically Bolstered Investment Returns