Skipping Rebalancing for Years

You build a 60/40 portfolio in 2013 to match your risk tolerance. You check it in 2018: stocks have outperformed so much that it's now 80/20. You think rebalancing back to 60/40 is "selling winners," so you skip it. By 2022, your unbalanced portfolio suffers a crash worse than intended, and there's no bond cushion left.

Key takeaways

• Rebalancing means selling assets that have appreciated and buying those that haven't, which feels like losing a winner—but it's how you maintain your intended risk level
• Allocation drift happens silently: equities up 10% per year, bonds flat, means a 60/40 becomes 65/35, then 70/30, then 80/20 over 5 years without a single trade
• A 60/40 portfolio designed to lose 30% in a crash will lose 40%+ if it has drifted to 80/20, eliminating the diversification benefit you specifically chose
• Rebalancing annually (or quarterly) with new contributions is the easiest method for first-time investors; it requires no complex rules and is mostly psychological discipline
• Skipping rebalancing "because stocks are winning" is exactly when rebalancing is most necessary—that's when allocation drift is steepest

The silencer problem

A 60/40 portfolio (60% stocks, 40% bonds) has a defined purpose: it aims for a balance between growth and stability. Historically, this mix loses about 25–30% in a major bear market, compared to 35–40% for a stock-only portfolio. The 40% bonds are the shock absorber.

But over years of market rises, the allocation drifts. From 2013 to 2018, U.S. stocks returned roughly 15% annually while bonds returned 3%. A $100 60/40 portfolio became:

• Stocks: $60 × 1.15^5 = $121.7
• Bonds: $40 × 1.03^5 = $46.4
• Total: $168.1
• New allocation: 72% / 28%

The investor did nothing. No trades, no decisions. But the portfolio is now 12 percentage points more aggressive than intended. The shock absorber has weakened.

Compounding this further: if the investor thinks "stocks have done well, I shouldn't interfere," they skip the rebalance. By 2021, the same portfolio with another 3 years of equity outperformance is 80% stocks, 20% bonds. The diversification benefit is nearly gone.

The 2022 crash and the unprepared portfolio

In 2022, the Nasdaq fell 33% and bonds fell 14% (a rare simultaneous decline, but not unprecedented). A true 60/40 portfolio fell about 16–18%. That's a painful draw, but it's what a 60/40 investor agreed to accept.

But an investor who started with 60/40 in 2017 and never rebalanced had drifted to 80/20 by 2021. In 2022, their portfolio fell 28%—far worse than the intended 16%. Worse, they couldn't take solace in "bonds are stable." The bonds had also fallen, and they were only 20% of the portfolio, so they provided no cushion.

This investor faced a decision: buy at the trough (but they didn't believe in "catching a falling knife") or sit in cash and wait for recovery (but they had already suffered the worst of the loss). Many panic-sold and moved to cash at the trough—the classic forced selling mistake.

A rebalanced investor, by contrast, had a clear action: buy stocks, because the allocation was now 50/50 or 55/45 instead of 80/20. The rebalance forced the discipline of buying the dip.

The math of drift

Let's model the impact over 20 years. Assume:

• Equities return 8% per year (real, after inflation)
• Bonds return 2% per year
• Starting portfolio: $100,000 at 60/40

With annual rebalancing:

• After 10 years: $240,000 (still 60/40)
• After 20 years: $575,000 (still 60/40)

Without rebalancing:

• After 10 years: $265,000 (72/28)
• After 20 years: $683,000 (85/15)

The drift portfolio is higher—but it's also much riskier. A 20% bear market in year 21 would hit the rebalanced portfolio for about $46,000 (12% loss), but the drifted portfolio for about $68,000 (20% loss). The extra gain was eaten by extra risk.

Over 50 years, the drift is extreme. A 60/40 portfolio that drifts becomes a 95/5 portfolio. A single 35% crash (like 2008 or 2020) wipes out a decade or more of returns.

Why rebalancing feels wrong

The psychological barrier to rebalancing is simple: you're selling the winner (stocks) to buy the loser (bonds). Your brain interprets this as "selling high, which is good," but also "buying low-performing bonds, which is bad." The narrative feels inverted.

In reality, rebalancing is forced buying low and selling high—the opposite of chasing trends. After the stock market rises, rebalancing means selling some stock to buy bonds. After bonds rise (in a falling-rate environment), rebalancing means selling bonds to buy stocks. This is contrarian discipline.

But the emotional challenge is real. From 2013 to 2021, selling stocks to rebalance felt like catching a falling knife every year. Bonds were boring. Stocks were exciting. The rebalancer felt like they were leaving money on the table. Then 2022 came, and the rebalancer's bonds were a lifeline—while the drift-portfolio investor stared at 80/20 losses.

The rebalancing methods

Annual rebalancing with contributions is the simplest for savers:

• Once per year, direct new contributions (from paychecks, bonuses) to the underweighted asset class.
• If stocks have drifted to 70%, direct new money to bonds until the allocation is back to 60/40.
• No selling needed; just thoughtful buying.

Threshold rebalancing:

• Set bands (e.g., if stocks exceed 65%, rebalance back to 60%; if they fall below 55%, rebalance back to 60%).
• Only rebalance when the bands are breached.
• This is less frequent than annual but more responsive to big moves.

Quarterly rebalancing:

• Every 3 months, check the allocation and rebalance to the target.
• Simple, requires only 4 decisions per year.
• Catches drift before it's severe.

For most first-time investors, annual rebalancing with new contributions is ideal. It requires one decision per year and leverages contributions to do the work.

The cost of rebalancing

Rebalancing has real costs:

• Tax consequences: Selling appreciated assets in a taxable account triggers capital gains. In a Roth IRA or 401(k), this is irrelevant. Plan rebalancing to minimize tax.
• Trading costs: Commissions are now zero at most brokers, but bid-ask spreads still apply. This cost is small if rebalancing is annual.
• Opportunity cost: Some years, rebalancing means selling the best-performing asset. This can feel like a lost opportunity.

Balanced against these costs: a 2% annual outperformance benefit (from selling high and buying low systematically) and a massive reduction in crash risk.

The rebalancing decision tree

Related concepts

• Why We Rebalance
• The 3-Fund Philosophy
• The Meta-Mistake: No Written Plan

Next

Rebalancing keeps your allocation aligned with your plan. But what if the plan itself is based on outdated information? Many investors fail to update beneficiary designations after marriage, divorce, or the birth of children—and when the time comes, the wrong people inherit the money.