What AA rebalancing percentage do you use?

[goshenBogle]

To maintain asset allocation (AA), rebalancing decision is usually based on some percentage. So if the AA changes by more than that percentage, rebalancing is triggered so as to maintain the desired AA.

What percentage do you use?
And more importantly, how did you decide on that particular percentage?

[bombcar]

Some rebalance if it gets uncomfortable (e.g. if you are 80/20 and considered 75/25 through 85/15 but 90/10 was right out) then rebalance at those bounds.

Or just do it once a year and forget about it. The key is to define it so you don’t time it.

[enad]

Some rebalance if it gets uncomfortable (e.g. if you are 80/20 and considered 75/25 through 85/15 but 90/10 was right out) then rebalance at those bounds.

Or just do it once a year and forget about it. The key is to define it so you don’t time it.

The OP is asking what triggers a rebalance

To maintain asset allocation (AA), rebalancing decision is usually based on some percentage. So if the AA changes by more than that percentage, rebalancing is triggered so as to maintain the desired AA.

What percentage do you use?
And more importantly, how did you decide on that particular percentage?

Larry Swedroe's "5/25 rule" suggests rebalancing an investment portfolio when an asset class deviates from its target allocation by either an absolute 5% (for allocations of 20% or more) or a relative 25% (for allocations less than 20%), whichever is less.

With the 5/25 rule, rebalancing is purely mechanical

[connor]

I treat the absolute 5% guideline as a helpful suggestion. And by suggestion, I mean I'm pretty casual about it. How did I decide on that particular percentage? It's just something I've heard about from various sources. It sounds kind of reasonable and "about right."

[livesoft]

I use RBDs to decide whether to look to rebalance or not. These so-called Really Bad Days occur very infrequently, sometimes less than once a year on average, but sometimes more. They are not to be ignored, but one doesn't have to take action after they at least look.

[prioritarian]

The key is to define it so you don’t time it.

My rule has always been that I rebalance when I feel like it. In practice, this means that I rebalance around 4-7 times a year. I fail to understand why this is market timing.

[mkc]

5% and I only do so annually if needed. This is actually the time of year (right after filing taxes) that I look at the accounts and decide what, if anything, needs to be done.

[rkhusky]

1% bands because I don’t like to make large dollar transactions. And I am fairly strict to prevent rebalancing based on emotion or gut feeling.

[windaar]

For decades I have just rebalanced on or near my birthday. If I have an excess in stock funds I rebalance right away. If stocks are down I rebalance with new money over the next few months to avoid selling TIAA TRAD and messing up the vintages.

[GrumpyFarmer]

I am sure this is going to go against the grain here…

I do not worry about the %…sure you can calculate the percent but what does that mean? I also could care less about daily market close…why even look unless a day trader which I stopped that after tech bubble burst. I am also not retired (yet) but I am well past my FI target. I just recently added bond fund at first of the year…but for now it’s based on minimum dollars I want in bond fund. My goal was to get to a total dollar (asset value) amount before I added bond fund. When I achieved it, then I added bond fund. Now maybe my plan will change when I stop working, but for now its based on minimum dollars I want in bond (I have a plan how I will increase the dollar value in bond annually up until I stop working…and that is based on growth strategy vs protection strategy…for the other buckets I just want more…sure there is a percent there if you want to do the math, but it’s not a target.

I think % could be used as a guage of sorts but it doesn’t really make sense based on the difference in total amounts we have. Same with the withdrawal %…how does that help? It wouldn’t help me…but I also don’t watch a pot of water waiting for it to boil…why watch the market and fret over a percentage? Purchasing power (what you can buy/spend) is what matters not a percentage. Goal for me is not run out of what I will spend…not a percent. (40% of my couple dollars is not relevant to 40% of someone else’s total dollars)

I can only control what I save and what I spend, percent matters not to me. (Percent is the result of a calculation…if that helps you sleep and makes you feel like you are in control, then set a percent, it changes not what the market does or what will be distributed or how much you can buy)

YMMV.

[grabiner]

Since I have a lot of asset classes in my portfolio, I use a variant of the 5%/25% rule. If my allocation to a major asset class (US stocks, international stocks, bonds, REITs) is off by 25% of the target allocation to that class, I will rebalance; if my allocation to either a major asset class or subclass is off by 5% of my total portfolio, I will rebalance.

For example, in 2007, my target allocation to emerging markets (a subclass) was 10%. It had reached 14%, but I did not sell to rebalance. (New money went elsewhere, and I was able to incidentally fix the imbalance when the market crashed in 2008 and I sold some emerging markets for a capital loss to buy other stock funds.) But in October 2008, my target allocation to bonds was 10%, and after the market crashed, it reached 13%, exceeding the 25% rule, so I sold bonds to buy more stock.

[3funder]

Roughly 5%, but I'm not religious about it by any means.

[Gecko10x]

I use a sliding scale depending on allocation size.
Allocation: Absolute deviation allowed
2-3%: 1%
4-5%: 1.5%
6-8%: 2%
9-11%: 2.5%
12-15%: 3.5%
16-30%: 5%
31-40%: 6%
41%+: 7%

I sourced this several years ago from a white paper which is no longer available online.

[lostdog]

I just check it when I grab my tax forms. If it's near 5% off, then I'll re balance.

[JakeyLee]

I rebalance once a year (January). I’ve been seeking out simplicity for the last several years. Once a year is easy. So far, so good.

[FoundingFather]

I am still in accumulation. I rebalance gently by always buying at my asset allocation goal. I am 80/20 stocks to fixed income, so I just buy at 80/20, then let it drift where it wants.

Founding Father

[Raspberry-503]

I use the "5/20" rule, rebalance if either:
- you are off more than 5% in absolute terms. for example if your target is 35% BND then you rebalance if you cross 30% or 40$
- if you are off more than 20% relative. for example if you have 10% AVUV target, you rebalance if it crosses 10%x(100%-20%) = 8%, or 10%x(100%+20%) = 12%
The first rule tends to trigger first for large allocations and the second for assets like have a a lower target (like 10% AVUV)

and I rebalance exactly to the target for the asset class target (for example if AVAU is 7.8%, I'll buy enough to get back to the 10% target). I don't rebalance other asset classes unless they hit their own 20/5 band

I have a spreadsheet that automatically flags if I'm out of the 20/5 band and will help me figure our how to sell...

I should also say that I have plenty of tax sheltered that I only rebalance by selling on those accounts, never in my brokerage. I'm still accumulating so I do put some amount every month in both brokerage and 401(k), so I update my spreadsheet every month or so and decide where future contributions will go to. So if DND is trending low, I'll change future 201(k) contributions to be higher in BND. I probably change future contributions times a year on average? but it helps not hitting the 20/5 bands (I think I did that twice, once was during the pandemic, and once was last year, when my US/International needed rebalanced)

BTW it's the same as 5/25 someone mentioned earlier, I just chose 20%, I wasn't to say after reading Kitces but I may be misremembering. the difference is minor

[fireDE]

No percentage-based bands here, because I didn’t like the complexity*. I opted for calendar-based rebalancings incl. withdrawals. Research has not shown a singular best approach to rebalancing, so my TLDR was both percentage-based and calendar-based rebalancing strategies are good enough in practice, and it’s ultimately up to personal preference. (See e.g. The Four Pillars of Investing, 2nd edition.)

My setup:

• I withdraw from the portfolio quarterly for consumption. This effectively gives me four mini-rebalancing events per year.
• Every two years (in even years like 2026, 2028), if/when needed, I will do a regular rebalancing. Because of the former mini-rebalancings, this should happen rarely.

*For example: Absolute vs. relative percentage changes as rebalancing triggers? If both, in what combination? I worked through some scenarios in a spreadsheet, and there were a couple of outcomes from percentage-based rebalancing (at least the way I modeled it) that were running counter to my intuitions and/or what I think would have been a better decision in that scenario. It’s been a while, so I forgot the exact specifics. I know math and how to work a spreadsheet, so I’m sure I would have been able to come up with a working solution for my personal situation. But one principle in my IPS is “Keep it simple. And if there are two solutions, then pick the simpler one ceteris paribus.”

[Artsdoctor]

I use the general 5% rule as a very rough estimate, but it's mostly about where to put new money. It's been years since I've had to sell higher-performing assets to buy lower-performing assets--the last major transfers of asset classes occurred in the 2008-2009 meltdown. All of that said, my equity allocation has gradually drifted downward by design as I've aged and our need to take greater risk has diminished so much.

Whatever you decide to do, make a plan. It'll allow you to diminish, or even remove, the emotion associated with investing.

[Leif]

Before retiring I used the 5/25 rebalance. After retirement I just passive rebalance. That means if I need cash I sell from the fund most over it's target.

[retiredjg]

I use 5% for stocks vs bonds and this is the only ratio I pay much attention to. When rebalancing is needed, I rebalance back into the band, not all the way to target.

I want about 30% of my stocks to be in international and don't worry if that rises or falls a little. I very rarely rebalance between US and foreign.

[gavinsiu]

I usually rebalance using a 10-15% band. However, I don't monitor my portfolio constantly. I feel that you should balance but you don't need it to be that rigorous. I feel like I end up rebalancing roughly every 2 years

[Artsdoctor]

Before retiring I used the 5/25 rebalance. After retirement I just passive rebalance. That means if I need cash I sell from the fund most over it's target.

Actually, this is an excellent way to rebalance. Many of us mostly rebalance with NEW money, whereas you're rebalancing with OLD money.

When deep into retirement, I'm curious if investors (particularly seasoned Bogleheads) actually buy more equities deep into bear market territory in order to maintain their asset allocation--or simply let things ride. I would imagine it might depend on what they're investing for at that point--heirs or themselves.