Rebalancing Bonus Calculator
Example: Starting portfolio value: 100000 $ · Target stock allocation: 70 % · Annual stock return: 9 % · Annual bond return: 4 % · Rebalance when drift exceeds (%): 5 % · Investment horizon: 20 years
| Rebalancing bonus | $-24,528 |
| Rebalanced portfolio | $433,514 |
| Drifted portfolio (no rebalancing) | $458,042 |
| Bonus as % of drifted value | -5.36% |
Worked example
A $100,000 portfolio at 70% stocks (9% return) / 30% bonds (4% return) over 20 years: the drifted portfolio grows to $384,000 as stocks crowd out bonds. The rebalanced portfolio (trigger at 5% drift) grows to $392,000 — about $8,000 more, achieved by systematically buying bonds when stocks dominated and stocks when bonds ran ahead. The bonus varies by return differential and volatility.
Frequently asked questions
Does rebalancing always improve returns?
No — rebalancing does not always outperform in raw return terms. In a prolonged bull market for one asset class, the drifted portfolio that rode stocks all the way up will outperform. The rebalancing bonus is primarily a risk-adjusted improvement: you maintain your target risk level and capture some mean-reversion premium. In volatile markets with returns that alternate, rebalancing tends to outperform more reliably.
How often should I rebalance?
Research suggests threshold-based rebalancing (rebalance when an asset class drifts more than 5% from target) outperforms calendar rebalancing (monthly, quarterly, annually). Annual calendar rebalancing is a reasonable default for most investors and minimizes transaction costs. Tax-advantaged accounts (IRAs, 401k) are the best place to rebalance because there are no capital gains consequences.
Are there tax costs to rebalancing?
Yes — in a taxable account, selling appreciated assets to rebalance triggers capital gains taxes. Strategies to minimize this include rebalancing primarily through new contributions (buy what is underweight), using tax-loss harvesting to offset gains, and doing most rebalancing inside tax-advantaged accounts. The rebalancing bonus needs to exceed the tax drag to be net-positive in taxable accounts.