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Portfolio rebalancing is essential for maintaining a disciplined investment strategy. However, the timing of rebalancing—when you actually make those adjustments—can significantly influence performance. Many investors default to a quarterly or annual schedule, but event-based rebalancing offers a smarter, more adaptive approach.
What Is Portfolio Rebalancing?
Portfolio rebalancing means adjusting your investments to bring them back in line with your target asset allocation. For example, if your target is 60% stocks and 40% bonds, and a market rally pushes your stock allocation to 70%, you would sell some stocks and buy bonds to restore balance.
Scheduled (Quarterly) Rebalancing: The Traditional Approach
Most investors rebalance on a set schedule, such as every quarter or once a year. The appeal is simplicity and predictability—you mark your calendar, review your portfolio, and make adjustments. However, this method has several drawbacks:
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Arbitrary timing: Markets don’t move in predictable three-month cycles.
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Potential missed opportunities: Major market moves might happen between rebalancing dates.
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Unnecessary transactions: You might rebalance when nothing material has changed, incurring costs and taxes without real benefit.
Event-Based Rebalancing: A Smarter Alternative
Event-based rebalancing focuses on market or portfolio triggers, not dates. Instead of rebalancing every quarter, you rebalance only when your asset allocation drifts beyond a set threshold—for example, if your stock allocation moves 5% away from your target.
This strategy adapts to what’s actually happening in your portfolio and the market.
Advantages of Event-Based Rebalancing
1. More Responsive to Market Changes
Event-based rebalancing ensures you respond to real deviations, not arbitrary timelines. If markets are volatile, you act more often; if they’re calm, you hold steady. This dynamic approach helps you stay aligned with your long-term risk profile.
2. Better Risk Control
By setting thresholds (say ±5%), you prevent your portfolio from becoming unintentionally riskier during bull markets or overly conservative during bear markets. This maintains the integrity of your investment strategy.
3. Reduced Transaction Costs
Because you rebalance only when necessary, you often trade less than in fixed-schedule systems—lowering transaction fees, bid-ask spreads, and potential tax drag.
4. Enhanced Tax Efficiency
Fewer unnecessary trades mean fewer taxable events. Combined with thoughtful threshold design, event-based rebalancing can improve after-tax returns.
5. Empirical Support
Research from Vanguard, Morningstar, and others has shown that threshold-based (event-driven) rebalancing can outperform calendar-based approaches on a risk-adjusted basis. It captures market gains more efficiently while preserving the intended risk exposure.
At CochranMickels Retirement Specialists, LLC., we believe that events base rebalancing provides better outcomes for our clients. What does your advisor do?
Mike
About the Author:
Mike Mickels is the President and Chief Compliance Officer of CochranMickels Retirement Specialists, LLC, and an avid sporting clay competitor. Our firm provides personalized planning and investment services to individuals approaching and in retirement. Disclaimer: This content is intended solely for informational purposes. CochranMickels Retirement Specialists, LLC and its representatives are only authorized to offer advisory services where properly licensed or exempt from licensure. Investing carries risks, including potential loss of principal capital. Our firm does not endorse external links, nor is it responsible for third-party content