Rebalancing is a risk minimization strategy, not a return maximization one.
And managing risk is an integral and crucial part of investing.
The New York Times had a great article on this last week.
From the article:
“If you had never rebalanced, a 60/40 portfolio containing two Vanguard index funds — Total Stock Market and Total Bond Market — would have switched over the five years through June to a 74/26 stock/bond portfolio. That’s because the stock fund gained 93 percent while the bond fund declined 0.59 percent.
You may be tempted to just leave well enough alone in the hope that the stock fund will keep rising. I can’t say that’s the wrong move, just that, when I’ve allowed that to happen to my investments, I’ve regretted it because eventually the stock market has fallen, and it’s hurt. Great years in the stock market are often followed by terrible ones.”
Taking on more risk does not guarantee a higher reward. It’s just increases the variance of outcomes. The goal of financial planning, diversification, and rebalancing is to reduce this variance, so you end up with a narrow range of acceptable outcomes.
For most people, having a binary outcome where you either feast on caviar or end up eating cat-food are not acceptable outcomes.
So while it’s tempting to focus on short-term market trends, the discipline of rebalancing is crucial for long-term investment success. By regularly reviewing and adjusting your portfolio’s asset allocation, you can better manage risk and increase the likelihood of achieving your financial goals.