Rebalancing, what is it really?

By: James Palmer

Key Points

  • Rebalancing is the best system available to help any long-term investor “buy low and sell high” year after year.
  • Rebalancing is investing logically; performance chasing is investing emotionally.
Emotion vs Logic Financial Advisement


Rebalancing is simply re-allocating your asset classes (stocks, bonds, cash) back to where they should be based on your risk tolerance, investment strategy, and goals.

The danger of not rebalancing is that over time your portfolio will not be allocated the way it was initially designed. Having a larger allocation in stocks while the market is going up may seem harmless in the moment, but as we all know, markets do not only go up, they go down as well. Having a portfolio that goes down more than you had anticipated can be detrimental to your financial goals and plans.

Rebalancing is the best system available today to help investors continue to consistently “buy low and sell high” year after year, making you a fantastic investor!

The great thing about rebalancing is that it does not need to be done very often. On average, you can expect to rebalance your portfolio 1 – 3 times a year depending on how volatile the market is, and what your financial circumstances are in relation to your investment portfolio.

Rebalancing takes the emotion out of making important investment decisions throughout your investing lifetime.

Performance Chasing

There is a big difference between performance chasing and rebalancing. The main difference is that rebalancing is an actual system that is not based on your personal emotions of greed and fear whatsoever.

Performance chasing can be very emotional. Performance chasing seeks to take advantage of short-term circumstances for gain based on fear and/or greed. It is comparable to gambling, if not actually. So, ask yourself, are you willing to gamble with your life savings?

Why does this matter?

Well, let us remind ourselves why from the legendary investor John C. Bogle (1929 – 2019).

John C Bogle
“Eliminate emotion from your investment program. Have rational expectations for future returns and avoid changing those expectations in response to the ephemeral noise coming from Wall Street…your emotions will defeat you totally…Short-term betting is not a good way to go…the two greatest enemies of the equity fund investor are expenses and emotions.”

My favorite investment book of all time is “The Little Book of Common-Sense Investing” by John C. Bogle.

He elegantly reminds us how emotional investing (performance chasing) is a loser’s game, and logical investing (rebalancing – staying the course) is a winner’s game.

It is not impossible to gain from performance chasing, otherwise, people would never try. It takes a great deal of expertise, and time to actively take advantage of the market. Even the experts do not consistently win at this game all the time. In fact, many Doctor of Economics and Finance would argue that the average investor who simply puts all their savings into a single well diversified fund, like the SP500 Index Fund, would outperform most active investment managers in the long term. This is because they would likely win on long term performance by lower fees, and practically zero emotional costs (actively trading in and out of funds based on fear and/or greed).

Sometimes, we hear people say they “rebalanced” their portfolios, when really, they were “performance chasing”. Taking money out of one market sector and putting it into another because you think it will do well for a season is performance chasing, not rebalancing.

There is plenty of gain to be had for those who invest logically rather than emotionally.

It pays to be well diversified and to have a financial advisor help you stay “logical” during your investing lifetime.

In no way are we condemning people who choose “active management (performance chasing)” over “passive management (buy and hold – rebalancing when appropriate)”.

What we are saying is that the buy and hold strategy, rebalancing, and staying the course works for any investor who is investing for the long term. That investing logically helps investors who are investing for the long run, rather than letting your emotions get the best of you.

That is easier said than done both during bear and bull markets. It helps tremendously to have a trusted financial advisor help keep you on course and keep your investment strategy aligned with both your short and long-term goals.