Does rebalancing improve returns? We tested 98 years — it cost 1.1 points a year.
The short answer
Rebalancing does not raise returns, and our own computation says it lowers them. Using Damodaran's NYU Stern series for 1928–2025, a 60/40 stock/Treasury portfolio rebalanced every year turned $100 into $257,108 (8.34% a year). Left completely alone, the same portfolio became $697,640 (9.45% a year) — 2.7 times more money. Rebalancing cost 1.11 percentage points annually. What it bought in exchange was risk control: volatility of 12.12% instead of 15.78%, and a worst year of −27.3% instead of −35.5%. The "rebalancing bonus" is a myth; rebalancing is a risk tool, and that is a perfectly good reason to do it.
Most articles on this topic claim rebalancing makes you money by forcing you to buy low. Our data says the opposite, and the reason why is the actually useful part.
What we tested
A $100 portfolio, 60% S&P 500 and 40% 10-year US Treasuries, run across all 98 years from 1928 to 2025 under two rules:
- Rebalanced: restored to exactly 60/40 at the end of every year.
- Drifting: never touched again.
| Rebalanced annually | Never rebalanced | |
|---|---|---|
| $100 grows to | $257,108 | $697,640 |
| Compound return | 8.34% | 9.45% |
| Volatility (annual SD) | 12.12% | 15.78% |
| Worst single year | −27.3% | −35.5% |
And across all 69 overlapping 30-year windows — a more realistic horizon than 98 years:
| Median 30-yr CAGR | Worst 30-yr CAGR | Median worst drawdown | |
|---|---|---|---|
| Rebalanced | 8.94% | 6.58% | −20.7% |
| Drifting | 9.45% | 6.63% | −24.6% |
The pattern is consistent: drifting wins on return, rebalancing wins on risk. In every framing.
Why rebalancing lost
Because it systematically sold the asset that went up more.
Stocks compounded at 10.02% over this period; 10-year Treasuries managed 4.53%. A rule that trims stocks back to 60% every year is a rule that repeatedly moves money out of the higher-returning asset and into the lower-returning one. Over 98 years that costs a lot.
The drift is dramatic. Starting at 60% stocks and never rebalancing, the stock weight becomes:
| After | Stock weight |
|---|---|
| 10 years | 49.7% |
| 20 years | 63.7% |
| 30 years | 86.9% |
| 50 years | 93.9% |
| 98 years | 99.6% |
So the "never rebalanced" portfolio didn't beat the rebalanced one because drifting is clever. It won because it stopped being a 60/40 portfolio. After 30 years it was 87% equities, and after 50 years it was effectively an all-stock portfolio. It earned more because it took far more risk — exactly the risk the investor originally decided they didn't want.
That reframes the entire question. The comparison isn't "which rule makes more money." It's "do you want to keep the risk level you chose, or let the market choose it for you?"
What rebalancing is actually for
The U.S. Securities and Exchange Commission states the purpose plainly in its beginners' guide to asset allocation:
By rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset categories, and you'll return your portfolio to a comfortable level of risk.
Note what that sentence does not promise. Not higher returns. A comfortable level of risk — which is to say, the level you'd actually hold through a decline.
This is why the return penalty we measured isn't an argument against rebalancing. A 60/40 investor who drifts to 87% stocks over 30 years will meet their first serious bear market with nearly 90% equity exposure and a plan built for 60%. The most likely outcome isn't that they patiently collect the higher return in our table. It's that they sell — and then the drifting portfolio's theoretical advantage becomes a realized loss. Our post on the psychology of panic selling is about that exact failure.
Rebalancing is insurance that you'll still be invested in year 31. It costs about a point a year. That's the trade.
The counterargument: Perold and Sharpe were there first
The honest objection to our result is that it's sample-dependent, and the theory explaining why predates our arithmetic by decades.
In Dynamic Strategies for Asset Allocation (Financial Analysts Journal, 1988), André Perold and William Sharpe showed that a constant-mix strategy — rebalancing to fixed weights — outperforms buy-and-hold in oscillating markets, because it mechanically buys dips and sells rallies, but underperforms in trending markets, because it keeps selling the asset that keeps rising.
Our 98-year window is one of the great trending markets in history: US equities rising through the American century. Perold and Sharpe's framework predicts precisely the result we got. In a flat-but-volatile era, the same test would plausibly favor rebalancing.
Two further caveats on our own numbers:
- We ignored taxes and transaction costs. In a taxable account, annual rebalancing realizes gains and adds cost, which makes rebalancing look worse than our table shows. In a tax-sheltered account the penalty is close to what we computed.
- We rebalanced on a rigid annual calendar. That's a deliberately crude rule. The SEC's guide describes two approaches — a calendar interval such as every six or twelve months, or a threshold that triggers only when an asset class drifts past a percentage you set in advance — and adds that "in either case, rebalancing tends to work best when done on a relatively infrequent basis." A threshold rule transacts less often than our annual one, which reduces both the cost and the return drag.
So the correct reading isn't "rebalancing is bad." It's "rebalancing is a risk-management decision whose return cost depends on the era, and anyone selling it as a free return boost is wrong."
A practical rule
- Pick a target allocation you'd hold through a 35% decline. That's the number that matters, and most people overestimate it.
- Use a threshold, not a calendar. Act when an asset class drifts more than about 5 percentage points from target. It's fewer transactions and it responds to what actually happened.
- Check no more than once or twice a year. Frequent monitoring produces frequent action, and frequent action is its own cost — see whether trading more often hurts your returns.
- Rebalance with new contributions first. Directing fresh money to the underweight asset avoids selling anything, which avoids the tax.
- Expect it to feel wrong. Rebalancing always means selling what's working. That discomfort is the mechanism, not a sign you're doing it badly.
The part that doesn't show up in backtests
Everything above assumes the rule gets followed. That assumption is where real portfolios fail.
Rebalancing into a decline — selling bonds to buy stocks while stocks are falling — is the single hardest routine action in investing. The arithmetic is trivial and the execution is not, because it requires adding to the thing currently hurting you. A spreadsheet does it without comment. People mostly don't.
That's the specific behavior Sydnical measures. You run real positions at live prices with nothing at risk, and the grading is on discipline, sizing, patience, and concentration rather than a balance that's mostly luck over short samples. The historical crash scenarios are the honest test of a rebalancing rule: it looks obvious in a calm market and very different in 2008 or 2000–02, when buying more equities felt reckless. And if you'd rather test the mechanics on a broker's own platform, our comparison pages say which one fits.
FAQ
Does rebalancing improve investment returns?
Generally no. In our computation of a 60/40 portfolio from 1928 to 2025, annual rebalancing returned 8.34% a year versus 9.45% for never rebalancing — a cost of 1.11 percentage points. What rebalancing delivered instead was lower volatility (12.12% vs 15.78%) and a milder worst year (−27.3% vs −35.5%). It is a risk-control tool, not a return enhancer.
How often should you rebalance your portfolio?
Infrequently. The SEC notes that investors commonly rebalance either on a calendar — every six or twelve months — or when an asset class drifts past a preset percentage, and that rebalancing "tends to work best when done on a relatively infrequent basis." A 5-percentage-point drift threshold checked once or twice a year is a reasonable default.
What happens if you never rebalance?
Your allocation drifts toward whichever asset grows fastest. Starting from 60% stocks in 1928 and never rebalancing, the stock weight reached 86.9% after 30 years and 99.6% after 98 years. Returns were higher, but only because the portfolio had quietly become far more aggressive than the one originally chosen.
Is there a rebalancing bonus?
Not reliably. Perold and Sharpe showed in 1988 that rebalancing to fixed weights beats buy-and-hold in oscillating markets and loses in trending ones. Because US equities trended strongly upward over the past century, rebalancing cost returns across that sample. Any claim of a guaranteed rebalancing premium is era-specific at best.
Should I rebalance in a taxable account?
Be more cautious there, because selling to rebalance realizes capital gains and adds transaction costs on top of the return penalty. The cheapest approach is to rebalance using new contributions — directing fresh money into the underweight asset — and to use a wider drift threshold before selling anything.
Sources
- Aswath Damodaran — Historical Returns on Stocks, Bonds and Bills, NYU Stern, updated January 2026 (S&P 500 and 10-year Treasury annual returns, 1928–2025)
- U.S. Securities and Exchange Commission — Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
- André F. Perold and William F. Sharpe, "Dynamic Strategies for Asset Allocation", Financial Analysts Journal 44, no. 1 (1988)
The 60/40 comparison is our own simulation over the Damodaran series: annual rebalancing to 60/40 versus no rebalancing, gross of taxes and transaction costs, as stated above.
Rebalancing doesn't make you richer. It makes you likely to still be invested when it matters. Test whether you'd actually do it →