Rebalancing During Bull Markets
Rebalancing During Bull Markets
If rebalancing in a bear market asks you to buy fear, rebalancing in a bull market asks you to sell euphoria. You're trimming the stocks that just rallied 40% to rebalance back to your target. This is often harder psychologically than buying losers, because you're selling something that's winning.
Key takeaways
- Bull markets cause stocks to drift above target allocation; rebalancing sells winners and raises cash/bonds.
- You're trimming the very asset driving the portfolio's outperformance, which feels like leaving money on the table.
- Recency bias, FOMO, and herding bias create massive psychological friction against selling rallying stocks.
- Historical data shows that rebalancers who trimmed in 2013–2014 (before the 2015 correction) and 2017–2018 outperformed by 0.2–0.5%.
- Written discipline and automation are the only reliable ways to override the "stay in the rally" temptation.
Why bull markets trigger rebalancing
A 60/40 portfolio starts with $300,000 in stocks and $200,000 in bonds. A strong bull market (2021, for example) sees the S&P 500 rally 28%. Your portfolio drifts to approximately $385,000 in stocks and $200,000 in bonds—a 65.9% stock allocation.
If your band is 55–65%, you've breached the upper limit. Rebalancing means selling $35,000 of stocks and buying $35,000 of bonds. You're selling the very thing that just made you rich.
Concrete example:
A $500,000 portfolio in January 2021: $300,000 in VTI (stocks), $200,000 in BND (bonds).
By December 2021, VTI rallied 28.7% and BND was flat. Your portfolio: $385,700 in VTI, $200,000 in BND. That's 65.8% stocks, 34.2% bonds.
Rebalancing to 60/40 means selling $17,850 of VTI and buying $17,850 of BND. You're trimming the winner. In January 2022, VTI fell 11%. If you had rebalanced in December 2021, you would have trimmed right before the decline. If you didn't rebalance, you held through it.
This creates a powerful bias: in real time, every rebalance in a bull market looks like a regrettable decision in the short term.
The psychological barriers: Why selling winners is uniquely hard
1. The illusion of continued rally
After a 28% rally, your brain extrapolates. "Stocks are on a roll. Why sell now? Another 20% upside is possible." Your experience of recent prices biases your expectation of future prices. Economists call this the "hot hand fallacy"—the false belief that recent performance predicts future performance. It usually doesn't.
2. FOMO (Fear of Missing Out)
You sold stocks at $435, and they rally to $450. You feel like you missed the 3.4% additional gain. FOMO is acute in bull markets. Every rebalance that trims winners creates a regret narrative in your head.
3. Regret aversion
You're imagining a counterfactual: "If I hadn't sold, I'd be even richer." This narrative is emotionally powerful. It's not based on your precommitted allocation plan; it's based on a hypothetical "no rebalance" decision.
4. Herding bias
Everyone is bullish. Your brother made 40% in the market. A friend went 100% stocks in 2020 and is celebrating. Your financial advisor is talking about "a new era of returns." Trimming in this environment feels contrarian—not prudently disciplined, but wrongly pessimistic.
5. Availability bias
You hear stories of investors who stayed 100% in stocks during 2010–2020 and are now millionaires. You don't hear about the 100%-stock investors who didn't rebalance before 2022 and lost 37%. The stories available to you are biased toward "staying in the rally."
6. Loss aversion, reversed
In a bull market, rebalancing feels like you're voluntarily giving up gains. This triggers loss aversion in reverse—not the fear of losing what you have, but the pain of not gaining what you could. Research shows people feel this acutely.
Historical case studies: Rebalancers who trimmed at the right time
2013–2014: The S&P 500 boom
The S&P 500 rallied 32% in 2013 and 13.4% in 2014. A 60/40 rebalancer in late 2013 found stocks drifting to 68%+. Rebalancing meant selling stocks and buying bonds right as everyone was proclaiming "this time is different."
In August 2015, the market corrected 12%. In 2016, volatility spiked. But by then, the rebalancer who trimmed in 2013–2014 had captured the rally, rebalanced to a lower stock weight, and had protection built in for the turbulence.
The outperformance wasn't massive—maybe 1–2% over the 2015–2016 turbulent period. But it came from following a mechanical rule, not from market timing skill.
2017–2018: The FAANG run and the December 2018 correction
FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) rallied dramatically in 2017. A broad-market 60/40 rebalancer still benefited from the rally but automatically trimmed in late 2017 as allocations drifted to 67–70%.
December 2018 saw a 20% correction. Rebalancers' lower stock allocation meant smaller losses. By the end of 2018, when others were panicking, rebalancers actually had to buy stocks to rebalance—harvesting the losses.
2021: The final rally before the 2022 correction
VTI rallied 28.7% in 2021. A disciplined rebalancer trimmed aggressively in November and December 2021, raising cash. In 2022, VTI fell 18.4%. The rebalancer's lower stock allocation meant 4–6% smaller losses.
By December 2022, bonds had rebounded and stocks were lower. Rebalancing meant buying stocks at a discount. The discipline that felt regrettable in January 2022 was the exact reason the rebalancer's portfolio recovered faster in 2023.
The hard math: Why trimming works
Rebalancing is, mathematically, a mean-reversion bet. It says: "Assets that are up sharply will eventually regress toward their historical return patterns." This isn't market timing (which tries to predict direction). It's statistical—a simple statement that over-weighted assets tend to underperform under-weighted assets in the next period.
Decades of research confirm this. An overweighted asset (say, 70% stocks in a 60/40 target) underperforms an underweighted asset (40% stocks) in the subsequent period, on average. Not always, not dramatically, but reliably, in aggregate.
Rebalancers who trim winners and buy losers capture this mean reversion. The data shows roughly 0.2–0.5% annual outperformance from this discipline.
Example: 2019–2021, international stocks (VXUS) lagged US stocks (VTI). A disciplined rebalancer continued buying VXUS to maintain the allocation, even though it was the worst performer. In 2022–2023, VXUS outperformed VTI, and the rebalancer's VXUS holding performed better in relative terms.
The three resistance points
Point 1: The first trim in a long rally
This is the hardest. You've been holding stocks through a five-year bull market (2016–2020, for example). Suddenly, in early 2021, stocks are at all-time highs and you're supposed to trim? Every atom of your experience suggests holding. Trimming feels like selling the peak—not realizing gains, but voluntarily walking away.
This is when precommitment is essential. Your written plan says "trim if stocks exceed 65%." They do. You trim, mechanically. No judgment.
Point 2: The second trim, six months later
Stocks kept rallying. You trimmed in May at 2021, and now in November, they've rallied another 12%. You're supposed to trim again. This feels silly—you just trimmed and it feels like you left money on the table.
Discipline is doing it anyway.
Point 3: The trim before the correction (if you time it accidentally)
This is the easiest trap: sometimes your rebalance happens just before a sharp correction. You trim in December 2021, stocks fall in January 2022, and you feel like a genius market timer. The danger is thinking you predicted the correction. You didn't. You were just rebalancing mechanically on schedule. Next time, the correction might not come for two years, and you'll have regretted the trim all that time.
Don't confuse luck with skill. Rebalancing is not market timing.
How to execute bull-market rebalancing
Step 1: Check your allocation quarterly.
If quarterly checks were annual, you might miss a 40% rally and rebalance only at year-end. Quarterly checks force you to rebalance in smaller tranches, reducing the psychological pain of any single decision.
Step 2: Execute mechanically without commentary.
Don't justify the trade. Don't ask "Is this a good time?" Just execute. If stocks are 67% and your band upper is 65%, sell until you hit 60%. Done.
Step 3: Redirect new contributions to underweighted assets.
If you're adding $5,000 to the portfolio and stocks are overweighted, invest the contribution entirely in bonds or international stocks. This is rebalancing without selling—it's easier psychologically and avoids trading friction.
Step 4: Use tax-loss harvesting to soften the regret.
If stocks are overweighted but have losses in a taxable account, trim the most-profitable positions and hold positions with losses. Harvest the losses for tax purposes. This creates a small "win" (tax deduction) to offset the emotional pain of trimming winners.
Step 5: Automate.
Use a robo-advisor, automated rebalancing at your brokerage, or M1 Finance's automatic rebalancing. The machine doesn't have FOMO or herding bias. It trims overweighted positions robotically. This is the single most effective tool for bull-market discipline.
The payoff: Data from actual rebalancers
Vanguard analyzed investor behavior during 2010–2020, one of the strongest bull markets on record. Investors who maintained a 60/40 allocation (through rebalancing) outperformed investors who "set it and forgot it" at 100% stocks by 0.27% annually, on a risk-adjusted basis.
Why? Because the 60/40 rebalancers bought the 2015–2016 dips (when stocks were weak) and trimmed before 2018's weakness. Their discipline in buying weakness and selling strength added value.
For a $500,000 portfolio over 10 years, 0.27% is roughly $15,000–$20,000 in additional wealth. That's the cost of FOMO.
Bull market rebalancing flowchart
Related concepts
Next
Whether in bull markets or bear markets, rebalancing is a test of discipline. But many investors outsource the discipline entirely—they buy target-date funds or robo-advisors that rebalance automatically, at the fund's cost. The next article examines how rebalancing works inside target-date funds and what you pay for that convenience.