A Contrarian View of Portfolio Rebalancing

John Robinson |

"At the other end of the spectrum is the founder of index fund powerhouse Vanguard Investments John Bogle. In a CNBC interview, Bogle said he never rebalances his investments."

U.S. News columnist Barbara Friedberg used my commentary for her article titled... Sometimes Rebalancing Does More Harm than Good. So many financial advisors today tout portfolio rebalancing as an important element of their value propositions. Unfortunately, published academic research does not support this position and finds that rebalancing, especially in retirement, may be harmful.  Below are a couple of excerpts from academic papers published in Journal of Financial Planning that provide the foundation for the view I espoused to Barbara:

Is Rebalancing in Retirement Necessary (Dr. John Spitzer and Dr. Sandeep Singh, Journal of Financial Planning, June 2007.)

"Withdrawing bonds first, over stocks, performs the best of all the methods, though the resulting stock-heavy portfolio may make some investors uneasy. This method also is most apt to leave a larger remaining balance at the end of 30 years, while rebalancing leaves the smallest amount."

“While the wisdom of rebalancing in the accumulation phase of the life cycle is widely accepted, the wisdom does not appear to extend to the withdrawal phase.”

“Rebalance is shown to be the least effective harvesting method and Bonds First the best for maximizing PIBR [remaining balance].”

Reducing Retirement Risk with a Rising Equity Glidepath (Dr. Wade Pfau and Michael E. Kitces. Journal of Financial Planning (2013)

"Results show, surprisingly, that rising equity glide paths in retirement—where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon—have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios.”