Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 173

How rebalancing can help your portfolio

As with most things in life, it is the less exciting aspects of managing a portfolio such as rebalancing that turn out to be the most important. So what does rebalancing mean? Quite simply, it’s repositioning your portfolio back to target weights.

This is the first in a series exploring different methods to rebalance a portfolio. There are plenty of ways to do this, but here we start with the simplest method – calendar rebalancing, which means rebalancing over a set period of time, and it can be done at different time intervals.

'Set and forget' performs worst in this example

Assume we started in August 1996 with $100,000 to invest and run the analysis for 20 years. We chose four stocks – BHP Billiton (BHP), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Woolworths (WOW). We set our target weights at 30%, 20%, 20% and 30% respectively. This is not about portfolio construction, so for illustrative purposes four stocks is enough.

We consider four scenarios; ‘Set and forget’, monthly, semi-annual and annual rebalancing. We rebalance our portfolio irrespective of what the stock price has done, what we think (or hope) it’s going to do and simply buy or sell shares at the calendar end of the period to take our target weights back to our starting position. With calendar rebalancing, there is no emotion.

‘Set and forget’ lets us down here with a final portfolio value of $523,000.

Source: FactSet, Owners Advisory, September 2016 (Click to enlarge)

However, simply rebalancing the portfolio (albeit a very simple portfolio) monthly gives a final portfolio value of $587,000, semi-annual rebalancing gives a final portfolio of $545,000, and for this portfolio, annual rebalancing adds no value. The total returns for these portfolios are shown in the table below:

The performance difference from rebalancing is significant, particularly over a long period of time. Why? Let’s look at two of these scenarios and the weights through time to show the story.

‘Set and forget’ weights through time impact performance

Source: FactSet, Owners Advisory, September 2016

‘Monthly rebalancing’ holds our exposures largely constant through time

Source: FactSet, Owners Advisory, September 2016

Looking at the weights through time we see that, should we just set and forget, Woolworths becomes a large position in our portfolio. In fact, our dollar holding in the set and forget portfolio increases to over 50% of our portfolio.

In our monthly rebalancing, we begin to see why rebalancing performs the best for a concentrated stock portfolio. By design, we buy stocks when they have fallen below our target weight and we sell stocks when they have risen above our target weight. We are implementing the ‘trader’s catch-cry’ of buying low and selling high simply because we have held true to the weights we started with.

The second reason why rebalancing helps is it is the simplest method of portfolio risk control. Consider WOW: in the set and forget portfolio, we have let our best performers run, which is a very tempting way to manage a stock portfolio. But looking at what happens when WOW reprices reveals the other side of why a rebalancing regime helps overall portfolio performance.

By 2015, in the ‘set and forget’ portfolio the dollar holdings in WOW has risen to approximately $400,000, as opposed to around $200,000 in the monthly rebalanced portfolio

Source: FactSet, Owners Advisory, September 2016

Woolworths fell 9.5% on 26 to 27 February 2015, costing us 4.5% in the entire portfolio on the day ($30,000 in dollar terms). However, in those portfolios where we have controlled our total exposure to a single stock, we see that while we still suffer a loss, it is only 2.5% of the portfolio’s value ($18,000 in dollar terms).

Simply having the discipline to hold shares at predetermined weights can go a long way to adding value to the total portfolio’s returns over the long term.

In the next instalment, we look at using the percentage deviation from target weights as our rebalancing trigger to see whether we can improve our overall portfolio performance by being just a little bit more sophisticated.

 

Leah Kelly is Portfolio Manager at Owners Advisory. This article is general information and does not consider the circumstances of any individual.

 

6 Comments
Errol Davey
August 17, 2019

The figures would be vastly different if the 20 year period was from 1999 to 2019, WOW is now $36.00.

Ramon Vasquez
February 11, 2018

Hi Everyone ...

Thanks very much for the article , especially as l have been to much of a trader ,but am now approaching retirement age and need to change my style accordingly .


Would it be possible to make a comparison similar to the outline and some querical objections , against an EQUALLY WEIGHTED portfolio of the same four stocks , l wonder ???

Best wishes , Ramon Vasquez .

Kevin
September 17, 2016

Rebalancing always baffled me,the high costs of churning as others have pointed out.Shooting the horse that wins the race to feed it to the ones that lost,weird.Should we not just let winners run?

I would have no problem with a concentrated portfolio,looking for the end result and the magic of compounding.The dividends they would bring in after retirement.

Have dividends been reinvested as the total seems a bit low.If they have then CBA would now be far ahead of all the rest of that portfolio,probably with a good performance from WOW.

I remember reading the 'Top stocks ' book in the early 1990s,I forget the name of the guy that writes it.Of 10 stocks I think 3 of them went bust,but the silly thing was,he had sold out of Westfield.Westfield had swamped the rest of the portfolio and was worth more than all the other shares put together.Preaching the necessity to rebalance so the portfolio was not concentrated.

I would what Frank Lowy's answer would be if somebody told him he was silly for not rebalancing,just a thought.

gismo
September 16, 2016

Furthermore, were trading costs included? I think they would have been relatively significant to the monthly re-balancing portfolio.

Leah
September 15, 2016

Hi - thanks for your question. I will be looking at that in part 3 as yes - it certainly changes the numbers reported.

sandgroper
September 15, 2016

Hi Leah, capital gains tax (particularly for individuals but also for super) would be a major source of performance leakage from this strategy, have you looked at after-tax performance of rebalancing vs set and forget? Thanks

 

Leave a Comment:

RELATED ARTICLES

Understanding the benefits of rebalancing

The asymmetric value of gold for Australian investors

ETFs and the art of portfolio rebalancing

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.