Should You Rebalance Your Portfolio?

Does it really matter if you adjust your asset allocation every year-or not?

By Jean Chatzky
Jean Chatzky is MOREs financial columnist.

Jean Chatzky is MORE’s finance expert. Read more of her advice here.

A couple of months back, the legendary John Bogle of Vanguard was on my radio show and I asked him about rebalancing your portfolios to keep a mix of stocks, bonds, and cash (or other asset classes) in check.  “I think rebalancing makes a substantial amount of sense,” he says. With his own accounts, though, he noted, “I don’t rebalance… I leave it alone.  I have not touched my asset allocation since March of 2000.”

Hmmm, I started to wonder.  Which was better for an individual – doing as Bogle said? Or doing as he did?  After all, the advice I’ve been giving for years is that if you take 100 and subtract your age, you’ll have a rough estimate of the amount of your portfolio you should have in stocks.  The rest should be in bonds or other safer havens. Then, each year, as you age, you take down the stock component by a percentage point.   But I hadn’t tested the theory – at least not recently.

The folks at T. Rowe Price were willing to use their computers to help me out.

Let’s take a 40-year old who had $100,000 invested in an asset allocation of 60 percent stocks and 40 percent bonds in 2000.  Each year in January, they adjust that allocation by one point, so that in 2001 they are invested 59% in stocks and 41 percent in bonds, in 2002 they have 58% in stocks and 42 percent in bonds, and so on. They also rebalanced their portfolio on the same day.  By continuing this strategy, they would have seen a 13.3% return on their investments by December 2008 – increasing the value of their portfolio to $113,261.

If, on the other hand, that 40-year-old just let it ride without adjusting their asset allocation at all in those eight years, they’ve seen a 12.9% return on their investments – for a total balance of $112,992.

If they only rebalanced, so that their asset allocation would remain 60% stocks and 40% bonds, they’d see a return of only 9.3%, and a total portfolio balance of $109,303.
Bottom line: It’s pretty close.   If we had run the example to rebalance in March rather than January would the numbers had been different?  If we’d started in 1999 and ended in 2009, what then? I’m glad my advice looks to have been sound (and also glad – as I’ve been a fan for years – that Bogle’s own system is working).  But clearly there’s more work to be done here.


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