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Does Portfolio Rebalancing Work? Yes, Even in Bear Markets
Investing for GrowthInvesting for RetirementClient Conversations
Consider adopting a portfolio rebalancing strategy, even during down markets.
A bear market can sometimes throw your finely tuned asset-allocation mix out of whack. As stocks lag, your bond portfolio may start to outperform. Next thing you know, your “ideal” 70%/30% asset mix might be drifting toward a 60%/40% or evena 50%/50% split, and your actual mix no longer matches your risk profile.
You should consider adopting a portfolio rebalancing strategy—even during down markets when it’s tempting to let your “winners” keep growing while your “losers” are taking their lumps. That’s because rebalancing helps you buy low and sell high—an investing adage that’s easy to say and hard to do.
The chart below illustrates hypothetical outcomes for buying and holding vs. having two alternative rebalancing strategies.
Bottom line: Rebalancing can be a helpful investment discipline, whether you do it annually or use a rules-based system to rebalance only when stocks decline by a certain amount.
Doing the Math: Buy and Hold vs. Having a Deliberate Rebalancing Strategy
| Buy and Hold (No Rebalancing) | Rebalance Annually | Portfolio Rebalanced to 70%/30% Only After 20% Drop* | |||||||
| Date | Stocks % | Bonds % | Investment Value | Stocks % | Bonds % | Investment Value | Stocks % | Bonds % | Investment Value |
| 1/1/1999 | 70 | 30 | $100,000 | 70 | 30 | $100,000 | 70 | 30 | $100,000 |
| 12/31/1999 | 74 | 26 | $114,483 | 74 | 26 | $114,483 | 74 | 26 | $114,483 |
| 12/29/2000 | 70 | 30 | $110,228 | 66 | 34 | $111,180 | 70 | 30 | $110,228 |
| 12/31/2001 | 65 | 35 | $103,878 | 65 | 35 | $104,745 | 68 | 32 | $103,647 |
| 12/31/2002 | 57 | 43 | $92,574 | 62 | 38 | $91,763 | 68 | 32 | $90,717 |
| 12/31/2003 | 62 | 38 | $109,367 | 74 | 26 | $111,319 | 73 | 27 | $109,632 |
| 12/31/2004 | 64 | 36 | $118,564 | 71 | 29 | $121,247 | 74 | 26 | $119,593 |
| 12/30/2005 | 64 | 36 | $123,317 | 71 | 29 | $126,300 | 74 | 26 | $124,687 |
| 12/29/2006 | 67 | 33 | $137,730 | 72 | 28 | $141,905 | 76 | 24 | $140,694 |
| 12/31/2007 | 66 | 34 | $145,976 | 70 | 30 | $150,328 | 76 | 24 | $148,918 |
| 12/31/2008 | 54 | 46 | $112,795 | 58 | 42 | $113,759 | 62 | 38 | $110,015 |
| 12/31/2009 | 58 | 42 | $131,990 | 74 | 26 | $136,857 | 77 | 23 | $136,185 |
| 12/31/2010 | 60 | 40 | $147,187 | 72 | 28 | $153,973 | 78 | 22 | $154,038 |
| 12/30/2011 | 59 | 41 | $153,651 | 69 | 31 | $159,872 | 77 | 23 | $159,197 |
| 12/31/2012 | 61 | 39 | $170,796 | 72 | 28 | $179,803 | 79 | 21 | $180,445 |
| 12/31/2013 | 68 | 32 | $203,463 | 76 | 24 | $219,476 | 84 | 16 | $226,023 |
| 12/31/2014 | 70 | 30 | $226,334 | 71 | 29 | $244,433 | 85 | 15 | $254,133 |
| 12/31/2015 | 70 | 30 | $228,896 | 70 | 30 | $247,204 | 85 | 15 | $257,326 |
| 12/30/2016 | 72 | 28 | $249,874 | 72 | 28 | $269,864 | 86 | 14 | $284,468 |
| 12/29/2017 | 75 | 25 | $291,525 | 73 | 27 | $313,972 | 88 | 12 | $339,245 |
| 12/31/2018 | 74 | 26 | $281,954 | 69 | 31 | $304,347 | 87 | 13 | $326,195 |
| 12/31/2019 | 78 | 22 | $354,101 | 74 | 26 | $379,385 | 89 | 11 | $419,456 |
| 12/31/2020 | 79 | 21 | $410,603 | 72 | 28 | $436,791 | 77 | 23 | $465,113 |
| 12/31/2021 | 83 | 17 | $502,649 | 75 | 25 | $522,538 | 82 | 18 | $566,895 |
| 12/30/2022 | 82 | 18 | $415,902 | 69 | 31 | $435,898 | 81 | 19 | $469,494 |
| 12/29/2023 | 85 | 15 | $510,055 | 74 | 26 | $523,339 | 83 | 17 | $574,261 |
*This hypothetical investor rebalanced the portfolio after 20% equity drops on 3/12/01, 7/10/02, 7/9/08, 2/27/09, 3/12/20, and 6/13/22.
Talk to your financial professional about the benefits of a portfolio rebalancing strategy.
Past performance does not guarantee future results.Indices are unmanaged and not available for direct investment. Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. The chart above is for illustrative purposes only. Market performance data is based on daily changes in the S&P 500 Index and the Bloomberg US Aggregate Bond Index. The S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Bloomberg US Aggregate Bond Index is composed of securities that cover the US investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Source: Bloomberg Index Services Limited.
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