Welcome to Money for the Rest of Us. This is a personal financial show on money. How

it works, how to invest it, and how to live without worrying about it. I'm your host

David Stein. Today is episode 356. It's titled How When and Why Should You Rebalance

Your Investment Perfolio. When I was an institutional investment advisor, I would

meet quarterly with many of our clients. We would go over performance, potential

portfolio changes asset allocation, but invariably we would also look at rebalancing the portfolio.

It wasn't always easy to do because some of the assets were illiquid, such as venture

capital or private real estate. Rebalancing involves selling assets that are overweight

their strategic target and allocating the proceeds to assets that are underweight the target.

As many of the assets were illiquid, oftentimes rebalancing would focus on the public more

marketable investments. Now there are a number of ways to approach rebalancing. It could

be done on a calendar basis, could be monthly, quarterly, annually, or it could be a threshold

approach, a tolerance band. We rebalance when an asset is over or underweighted's target

by three percentage points or five percentage points. In this episode, we're going to take

a closer look at rebalancing. I pulled all the relevant research I could find over the

past decade with regard to what is the best approach to rebalancing and why would we even

need or want to rebalance? Let's address that first question. Why rebalance? A pure

buy and hold portfolio has a major drawback in that because stocks tend to outperform bonds,

if an investor has both, over time, the higher performing asset class, in this case stocks,

will become a larger and larger percent of the portfolio. I saw one academic study that

gave an illustration that a US stock and bond portfolio that was 60% allocated to stocks

in 1927. If the portfolio hadn't been rebalanced by 1929, stocks would comprise 76% of that

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