Does Portfolio Rebalancing Work? Yes, Even in Bear Markets (2024)

FAQs

Should you rebalance your portfolio during a bear market? ›

These portfolio strategies are helpful during a bear market and for any economic environment. Rebalancing and working with a financial partner are always good strategies to keep your portfolio on track to meet your goals.

Rebalancing is an important way to help minimize volatility in a portfolio and may improve long-term returns. Setting specific thresholds that trigger rebalancing can help eliminate emotion from the rebalancing process.

You should consider adopting a portfolio rebalancing strategy—even during down markets when it's tempting to let your “winners” keep growing while your “losers” are taking their lumps. That's because rebalancing helps you buy low and sell high—an investing adage that's easy to say and hard to do.

Expensive. Active rebalancing can also be expensive, as it involves trading fees and potential taxes. Each time an asset is bought or sold, investors must pay a trading fee or transaction costs.

It states that rebalancing between assets should occur only if an asset or category has drifted from its original target by an absolute percentage of 5% or a relative of 25% whichever is less.

This is a rule that aims to aid diversification in an investment portfolio. It states that one should not hold more than 5% of the total value of the portfolio in a single security.

Overall, annual rebalancing did the best job keeping risk in check, with an annualized standard deviation of 8.55% over the past 15 years. The annual rebalancing strategy also had the lowest downside capture ratio of 54.12%.

Many investors find January to be a good month to establish disciplined annual rebalancing since they will know their portfolio is allocated as intended at the start of every New Year.

How Often Should I Rebalance My Portfolio? Rebalancing too frequently can sacrifice returns. Rebalancing less often can bolster returns and increase portfolio volatility. Vanguard recommends checking your portfolio every six months, and rebalancing if the values drift 5% or more from target.

Buying investments low.

The silver lining of a recession is that many assets and investments fall in value. If you have the cash available, it's a great time to buy undervalued assets at a low price. Then, sell them for a higher price when the markets recover.

How do I avoid taxes when rebalancing my portfolio? ›

Research from Vanguard shows there is no optimal rebalancing strategy. Whether a portfolio is rebalanced monthly, quarterly, or annually, portfolio returns are not markedly different.

Smart Rebalance is a classic strategy that has been used for decades in the traditional industry. The core of the strategy is to increase the total amount of assets by selling high and buying low, at the same time maintaining the portfolio basically unchanged.

All else being equal, this will lead to a portfolio that underperforms an un-rebalanced portfolio as long as the trend persists. In mean- reverting markets, however, rebalancing leads to both increased returns and increased risk control.

But you can maximise your chances of a profit in a bear market by following bearish-friendly strategies. These include diversifying your holdings, focusing on the long-term, taking a short-selling position, trading in 'safe haven' assets and buying at the bottom.

Avoid knee-jerk reactions.

By selling when the market has fallen steeply, you're at risk of locking in a permanent loss of capital. To optimize your potential over the long term, what's crucial is time in the market, not market timing.

Factors determining when to rebalance your portfolio include market volatility, major life events, diversification concerns or simply the passage of time.