Challenging the Conventional Wisdom in Portfolio Management
By John H Robinson, Financial Planner (June 2025)
Automated periodic portfolio rebalancing is widely considered a best practice among financial advisors and investment managers. The conventional wisdom holds that rebalancing—systematically adjusting a portfolio back to its target asset allocation—reduces risk, improves returns, or both. The frequency of such automated rebalancing is most frequently set to monthly, quarterly, or annually. However, a growing body of scholarly and practitioner research, including influential work by Michael Edesess in Advisor Perspectives, challenges these assumptions and calls into question the value of automatic rebalancing for most investors.
The Conventional Paradigm
Traditional portfolio management theory advocates rebalancing as a discipline that maintains an investor’s desired risk profile and potentially enhances returns by “buying low and selling high.” Many financial institutions and advisory firms invest heavily in software to automate this process, reinforcing the belief that rebalancing is both necessary and beneficial[1][2][3]. Charles Schwab’s “iRebal” platform, which it obtained through the firm’s acquisition of TD Ameritrade, serves as an example of one such, highly-touted value-added service that is available to investment professionals and individual traders/consumers.
Challenging the Paradigm: The Case Against Automatic Rebalancing
1. Rebalancing Does Not Guarantee Higher Returns
Michael Edesess, a mathematician and economist with a PhD in stochastic processes, has published a series of articles in Advisor Perspectives that critically examine the value of rebalancing. In his October 2020 article, Edesess argues that the conventional wisdom is flawed: rebalancing does not consistently add value to returns. He observes that while rebalancing may reduce volatility in some cases, it does not reliably increase long-term returns and may even be counterproductive if the process incurs unnecessary transaction costs or taxes[1][2][4].
Edesess’s work is supported by other scholars and practitioners. For example, Victor Haghani and James White of Elm Management have also questioned the benefits of rebalancing, noting that the supposed advantages are often overstated or misunderstood[2].
2. Rebalancing and Risk: A Nuanced Picture
While some studies suggest that rebalancing can reduce portfolio volatility, the effect is not always significant or consistent across different market environments. Edesess and others point out that the benefits of rebalancing are highly dependent on market conditions and the specific assets involved. In certain cases, not rebalancing can lead to higher returns with only marginally increased risk, especially during prolonged bull markets in equities[4][3].
3. The Costs of Rebalancing
Automated rebalancing can introduce substantial costs, including transaction fees, bid-ask spreads, and potential tax liabilities. These costs can erode any theoretical benefits, particularly for taxable accounts or portfolios with high turnover[3]. Edesess and his peers argue that the costs of frequent rebalancing often outweigh the marginal risk reduction or return enhancement.
4. Academic Perspectives
Academic research on rebalancing is mixed. Some studies find that rebalancing can improve risk-adjusted returns, but only under specific conditions and with certain asset mixes. Other analyses, such as those cited in the CAIA blog, show that while rebalancing may outperform buy-and-hold about two-thirds of the time when asset returns are similar, the gains are modest and can be offset by infrequent but large losses when buy-and-hold outperforms[5]. The average returns of rebalanced and non-rebalanced portfolios are often similar, undermining the claim that rebalancing is universally beneficial.
Key Insights from Michael Edesess and Advisor Perspectives
Edesess’s articles in Advisor Perspectives have been particularly influential in challenging the rebalancing orthodoxy. His main arguments include:
- Rebalancing does not add value in the way most advisors claim. It is not a source of “free lunch” in terms of risk reduction or return enhancement[1][2][4].
- The benefits of rebalancing are highly context-dependent. The effectiveness of rebalancing depends on market conditions, asset correlations, and the investor’s specific goals and constraints[4].
- Automated rebalancing can be counterproductive. The costs and complexity of frequent rebalancing may outweigh any potential benefits, especially for long-term investors[1][3].
Conclusion: Rethinking Rebalancing
The evidence suggests that automated periodic portfolio rebalancing is not the universally beneficial practice it is often portrayed to be. While it may help maintain a target risk profile and reduce volatility in some cases, it does not reliably increase returns and can introduce unnecessary costs and complexity. Scholarly research, including the work of Michael Edesess in Advisor Perspectives, calls for a more nuanced approach to rebalancing—one that considers the specific needs, circumstances, and tax considerations of each investor rather than adhering to a rigid, automated process[1][2][4]. I subscribe to this approach and refer to it as “opportunistic rebalancing” in my communications with Financial Planning Hawaii and Fee-Only Planning Hawaii clients.
Investors and advisors should critically evaluate the costs and benefits of rebalancing and consider whether alternative strategies, such as buy-and-hold or opportunistic/tax-based rebalancing, might be more appropriate for their goals.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.
References:
- Edesess, M. (2020). The Fallacy of Rebalancing Revisited. Advisor Perspectives.
- Huebscher, R. (2025). Take This Test: How Well Do You Understand Rebalancing?
- Does Rebalancing Help Investors in the Withdrawal Phase? (2021). Advisor Perspectives.
- The Dangers of Rebalancing (2010). Advisor Perspectives.
- The Academic Failure to Understand Rebalancing (2022). CAIA Blog.
- The Optimal Rebalancing Strategy? (2019). Pension Pulse.
⁂
- https://www.advisorperspectives.com/articles/2020/10/19/the-fallacy-of-rebalancing-revisited
- https://roberthuebscher.substack.com/p/take-this-test-how-well-do-you-understand
- http://pensionpulse.blogspot.com/2019/02/the-optimal-rebalancing-strategy.html
- https://www.advisorperspectives.com/articles/2021/01/11/does-rebalancing-help-investors-in-the-withdrawal-phase
- https://caia.org/blog/2022/06/13/academic-failure-understand-rebalancing
