Rebalancing to a fixed stock/bond ratio is a little riskier than the
perfect rebalancing method proposed by Nobel Laureate William Sharpe*: select an AA, then adapt the AA to the current market weights of stocks and bonds when rebalancing.
Here's an example:
Initial:
Total market: 60% stocks / 40% bonds
Portfolio AA: 80% stocks / 20% bonds
Rebalance time:
Total market: 48% stocks / 52% bonds:
Adapt the AA to the new market proportions.
- stock change factor: 48%/60% = 0.8
- bond change factor: 52%/40% = 1.3
New AA:
- stocks: 80% x .8 / (80% x .8 + 20% x 1.3) = 71%
- bonds: 20% x 1.3 / (80% x .8 + 20% x 1.3) = 29%
=> Rebalance to 71% stocks / 29% bonds
This makes for smaller rebalancing transactions, and more importantly, if stocks or bonds (but not both) were go to zero, one wouldn't be ruined while continuing to rebalance. As Sharpe explains in his paper, it also avoids contrarian transactions; all market participants could adopt this rebalancing method and the market would still work. Unfortunately, the proportions of bonds and stocks in the market are not easy to find.
One shouldn't expect any rebalancing bonus or penalty out of the perfect rebalancing method. It is a market neutral method.
Infrequently rebalancing to a fixed ratio of stocks and bonds
is a good enough approximation of the
perfect rebalancing method, exposed above. Which trigger is used (fixed date, bands) is not important; it is more important for the rebalancing not to be frequent to minimize market impact.
*
William Sharpe paper about Adaptive Asset Allocation Policies: http://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)