What It Really Means & How to Do It

There are two primary approaches to determining when you should rebalance your portfolio: time- and threshold-based rebalancing. Let’s break down the key differences between these methods to help you choose the best solution.

Time-based rebalancing operates on a fixed schedule, typically annual, making it simple to implement and track. It’s ideal for hands-off investors who prefer routine and easy to automate and maintain. However, this approach may trigger unnecessary trades and might miss significant market shifts.

Threshold-based rebalancing triggers when allocations drift beyond set percentages (5-10%). This method requires more frequent monitoring and attention but usually results in fewer trades overall. It’s better suited for active investors who watch their portfolios closely and offers more responsiveness to market movements, though it requires more effort.

Both approaches have clear trade-offs in terms of complexity, cost, and effectiveness. Your choice should align with your investment style and how actively you want to manage your portfolio.

While a simple comparison might make threshold-based rebalancing seem more sophisticated, here’s what I’ve found after years of teaching this: the best ‘time’ to rebalance your portfolio is to do it consistently, once a year. Choose a method you can stick to the easiest and don’t get bogged down by any other complexities.