How Often Should You Rebalance Your Portfolio?
Should you rebalance your portfolio every month, every quarter, once a year, or just leave it alone? We answered it with real backtests: 6 classic portfolios, each run over its full common history of monthly total-return data - the longest stretching back more than 21 years to 2004 - comparing buy & hold against monthly, quarterly, and yearly rebalancing.
The bottom line
- Frequency barely affects returns. Across all 6 portfolios, the gap in annual return (CAGR) between rebalancing monthly, quarterly, and yearly was at most 0.15 percentage points.
- Yearly wins on risk-adjusted return. Of the three rebalancing schedules, annual had the best Sharpe ratio in 5 of the 6 portfolios. More frequent rebalancing just piles on trades and potential taxes for no reward.
- Rebalancing controls risk, it doesn't boost returns. In 4 of 6 portfolios, never rebalancing produced the highest raw return - letting stocks run pays off, but it also lets your risk drift upward.
- One exception: volatile, uncorrelated assets. For the Stocks + Gold mix, rebalancing beat buy & hold outright - adding about 0.6 percentage points of annual return and a higher Sharpe by systematically harvesting the two assets' swings.
How we tested it
Each portfolio uses monthly total-return data with dividends reinvested, run over its full common real-data window (no backfills). For every portfolio we computed four versions: buy & hold (set the weights once and never touch them) and rebalancing back to target monthly, quarterly, and yearly. For each we report CAGR, annualized volatility, the Sharpe and Sortino ratios (excess return over the risk-free T-bill rate, divided by total and downside volatility), maximum drawdown, and the number of rebalancing events. Results exclude trading costs and taxes, which only make frequent rebalancing look better than it would be in a real taxable account. See the full methodology for data sources and definitions.
We also average out timing luck. The month you happen to rebalance can nudge the result, so rather than pick one arbitrary calendar we run every possible rebalancing month and average them - 3 phases for quarterly (rebalance in month 1, 2, or 3 of each quarter) and 12 phases for yearly (a January rebalancer, a February rebalancer, and so on). The quarterly and yearly figures below are the average across all of those schedules, so what you are comparing is genuinely the effect of frequency, not the good or bad luck of one particular rebalancing date.
The meta-analysis: averaging all 6 portfolios
The clearest single view is to average each metric across all 6 portfolios for every rebalancing schedule. The differences are tiny but strikingly consistent: yearly rebalancing comes out best on risk-adjusted return (Sharpe and Sortino) and on average drawdown, while monthly - the most work of the three - is slightly the worst. The average CAGR gap between the three rebalancing schedules is just 0.067 percentage points, and buy & hold posts the highest average raw return but with more volatility and a deeper average drawdown.
| Rebalancing | Avg CAGR | Avg Volatility | Avg Sharpe | Avg Sortino | Avg Max Drawdown |
|---|---|---|---|---|---|
| Buy & hold | 10.02% | 12.77% | 0.68 | 0.94 | -29.49% |
| Monthly | 9.66% | 12.28% | 0.68 | 0.93 | -30.12% |
| Quarterly | 9.70% | 12.25% | 0.68 | 0.94 | -29.87% |
| Yearly | 9.73% | 12.22% | 0.69 | 0.94 | -29.32% |
Average of each metric across all 6 portfolios; the best risk-adjusted schedule is highlighted. The portfolios span different windows, so these averages summarize the overall pattern rather than a single tradable portfolio. The per-portfolio detail is below.
Portfolio by portfolio
Each table below has one row per rebalancing schedule; the growth chart plots $10,000 over the window on a log scale. Watch how tightly the lines overlap - that near-perfect overlap is the whole point.
Classic 60/40
60% US stocks / 40% US bonds (SPY, AGG) · 2005–2026 · 256 months
| Rebalancing | CAGR | Volatility | Sharpe | Sortino | Max drawdown | # Rebalances |
|---|---|---|---|---|---|---|
| Buy & hold | 9.02% | 10.44% | 0.72 | 0.96 | -29.73% | 0 |
| Monthly | 8.11% | 9.53% | 0.69 | 0.91 | -32.01% | 256 |
| Quarterly | 8.14% | 9.48% | 0.69 | 0.92 | -31.31% | 85 |
| Yearly | 8.21% | 9.44% | 0.70 | 0.94 | -29.69% | 21 |
Best risk-adjusted return (Sharpe) highlighted. $10,000 growth on a log scale below.
The four lines are nearly indistinguishable - $10,000 ends up in almost the same place no matter how often you rebalance.
Buy & hold produced the highest raw return (9.0% CAGR), but yearly rebalancing gave the best risk-adjusted return of the rebalanced schedules (Sharpe 0.70) with almost no difference in growth - the 0.11 pp gap between monthly, quarterly, and yearly is a rounding error over 21 years.
Three-Fund
US + international stocks + bonds (VTI, VXUS, BND) · 2011–2026 · 185 months
| Rebalancing | CAGR | Volatility | Sharpe | Sortino | Max drawdown | # Rebalances |
|---|---|---|---|---|---|---|
| Buy & hold | 11.29% | 12.80% | 0.79 | 1.09 | -24.13% | 0 |
| Monthly | 10.16% | 11.76% | 0.76 | 1.05 | -23.09% | 185 |
| Quarterly | 10.16% | 11.72% | 0.76 | 1.06 | -23.17% | 61 |
| Yearly | 10.19% | 11.74% | 0.76 | 1.06 | -23.21% | 15 |
Best risk-adjusted return (Sharpe) highlighted. $10,000 growth on a log scale below.
The four lines are nearly indistinguishable - $10,000 ends up in almost the same place no matter how often you rebalance.
Buy & hold produced the highest raw return (11.3% CAGR), but yearly rebalancing gave the best risk-adjusted return of the rebalanced schedules (Sharpe 0.76) with almost no difference in growth - the 0.03 pp gap between monthly, quarterly, and yearly is a rounding error over 15 years.
All-Weather
Ray Dalio all-weather (VTI, TLT, IEF, GLD, DBC) · 2006–2026 · 244 months
| Rebalancing | CAGR | Volatility | Sharpe | Sortino | Max drawdown | # Rebalances |
|---|---|---|---|---|---|---|
| Buy & hold | 7.23% | 8.90% | 0.65 | 0.85 | -23.61% | 0 |
| Monthly | 6.51% | 8.27% | 0.61 | 0.79 | -22.22% | 244 |
| Quarterly | 6.64% | 8.26% | 0.62 | 0.81 | -21.98% | 81 |
| Yearly | 6.67% | 8.28% | 0.63 | 0.82 | -21.58% | 20 |
Best risk-adjusted return (Sharpe) highlighted. $10,000 growth on a log scale below.
The four lines are nearly indistinguishable - $10,000 ends up in almost the same place no matter how often you rebalance.
Buy & hold produced the highest raw return (7.2% CAGR), but yearly rebalancing gave the best risk-adjusted return of the rebalanced schedules (Sharpe 0.63) with almost no difference in growth - the 0.15 pp gap between monthly, quarterly, and yearly is a rounding error over 20 years.
Stocks + Gold
60% stocks / 40% gold - volatile, uncorrelated (SPY, GLD) · 2004–2026 · 259 months
| Rebalancing | CAGR | Volatility | Sharpe | Sortino | Max drawdown | # Rebalances |
|---|---|---|---|---|---|---|
| Buy & hold | 10.68% | 12.17% | 0.76 | 1.08 | -26.13% | 0 |
| Monthly | 11.29% | 11.71% | 0.83 | 1.19 | -28.84% | 259 |
| Quarterly | 11.33% | 11.68% | 0.84 | 1.19 | -28.43% | 86 |
| Yearly | 11.31% | 11.64% | 0.84 | 1.19 | -27.45% | 21 |
Best risk-adjusted return (Sharpe) highlighted. $10,000 growth on a log scale below.
Even here the lines stay close, but the rebalanced lines pull slightly above buy & hold over time - the one case where rebalancing added return.
This is the exception. Buy & hold earned the lowest return here: quarterly rebalancing added about 0.6 percentage points of annual return (11.3% vs 10.7% CAGR) and a higher Sharpe, because rebalancing between two volatile, weakly-correlated assets systematically trims the leader and tops up the laggard - harvesting their independent swings.
Cap Tiers + International
Equal large / mid / small cap + international (IVV, IJH, IJR, EFA) · 2005–2026 · 256 months
| Rebalancing | CAGR | Volatility | Sharpe | Sortino | Max drawdown | # Rebalances |
|---|---|---|---|---|---|---|
| Buy & hold | 9.50% | 16.60% | 0.53 | 0.70 | -52.20% | 0 |
| Monthly | 9.39% | 16.39% | 0.53 | 0.69 | -51.92% | 256 |
| Quarterly | 9.39% | 16.38% | 0.53 | 0.69 | -51.88% | 85 |
| Yearly | 9.36% | 16.37% | 0.53 | 0.69 | -51.95% | 21 |
Best risk-adjusted return (Sharpe) highlighted. $10,000 growth on a log scale below.
The four lines are nearly indistinguishable - $10,000 ends up in almost the same place no matter how often you rebalance.
Buy & hold produced the highest raw return (9.5% CAGR), but monthly rebalancing gave the best risk-adjusted return of the rebalanced schedules (Sharpe 0.53) with almost no difference in growth - the 0.03 pp gap between monthly, quarterly, and yearly is a rounding error over 21 years.
Equal Sector
The 11 SPDR sectors, equal weight (XLK, XLF, XLE, XLV, XLI, XLP, XLY, XLU, XLB, XLRE, XLC) · 2018–2026 · 96 months
| Rebalancing | CAGR | Volatility | Sharpe | Sortino | Max drawdown | # Rebalances |
|---|---|---|---|---|---|---|
| Buy & hold | 12.43% | 15.72% | 0.66 | 0.96 | -21.14% | 0 |
| Monthly | 12.51% | 16.05% | 0.65 | 0.95 | -22.62% | 96 |
| Quarterly | 12.55% | 15.97% | 0.66 | 0.96 | -22.43% | 32 |
| Yearly | 12.63% | 15.85% | 0.67 | 0.97 | -22.07% | 8 |
Best risk-adjusted return (Sharpe) highlighted. $10,000 growth on a log scale below.
Even here the lines stay close, but the rebalanced lines pull slightly above buy & hold over time - the one case where rebalancing added return.
This is the exception. Buy & hold earned the lowest return here: yearly rebalancing added about 0.2 percentage points of annual return (12.6% vs 12.4% CAGR) and a higher Sharpe, because rebalancing between two volatile, weakly-correlated assets systematically trims the leader and tops up the laggard - harvesting their independent swings.
What this means for you
- Rebalance about once a year, or when an allocation drifts past a set band (for example 5 percentage points). That captures essentially all of the benefit.
- Don't obsess over frequency. Monthly and quarterly rebalancing add trades - and, in a taxable account, taxable events - without reliably improving return or risk.
- In taxable accounts, rebalance with cash flows first. Direct new contributions and dividends to your underweight holdings so you rebalance while selling as little as possible, limiting capital-gains taxes.
- Remember what rebalancing is for. It is risk discipline - keeping your stock/bond mix from quietly turning into something far riskier than you signed up for - not a way to squeeze out extra return.
Try it on your own portfolio
See exactly what to buy and sell to rebalance your portfolio →
Backtest your own allocation across decades of real data →
Frequently asked questions
How often should I rebalance my portfolio?
About once a year is enough for most investors. In our backtests of 6 portfolios, the difference in annual return between rebalancing monthly, quarterly, or yearly was at most 0.15 percentage points, and yearly usually had the best risk-adjusted return. Rebalancing annually - or whenever an allocation drifts past a set band - captures nearly all of the benefit with the fewest trades and taxable events.
Does rebalancing improve returns?
Usually not. Rebalancing is a risk-control tool, not a return booster. In 4 of our 6 test portfolios, simply buying and holding produced a higher long-run return than any rebalancing schedule, because it let the higher-returning asset (stocks) keep running. Rebalancing only added return in the one case built from two volatile, weakly-correlated assets (stocks and gold), where it harvested their independent swings.
How often should I rebalance my 401(k)?
Once a year is a sensible default, and many 401(k) plans offer free automatic rebalancing you can set and forget. Because a 401(k) is tax-deferred, rebalancing triggers no tax bill, so you can rebalance on a schedule or a drift threshold without worrying about capital-gains taxes.
Is monthly, quarterly, or annual rebalancing best?
For long-run growth they are nearly identical: across every portfolio we tested, the CAGR gap between them was no more than 0.15 percentage points. On a risk-adjusted basis, of the three rebalancing schedules annual had the best Sharpe ratio in 5 of 6 portfolios. Since monthly and quarterly rebalancing add far more trades for no reliable benefit, annual (or threshold-based) rebalancing is the practical winner.
What is threshold (band) rebalancing?
Instead of rebalancing on the calendar, you rebalance only when an asset drifts more than a set amount from its target - for example a 5-percentage-point band, so a 60% stock target triggers a trade only once stocks reach 65% or fall to 55%. It reacts to markets rather than the clock and often trades even less than annual rebalancing. Our study is calendar-based, but the conclusion carries over: what matters is that you rebalance occasionally, not exactly how you time it.
Does rebalancing more often reduce risk?
Only marginally. More frequent rebalancing keeps your allocation slightly closer to target, but in our tests monthly rebalancing did not meaningfully lower volatility or drawdowns versus annual rebalancing - and in several portfolios its worst drawdown was actually a bit deeper. The real risk reduction comes from rebalancing at all versus never; going from yearly to monthly mostly adds cost, not safety.
Hypothetical results exclude trading costs and taxes and are not a guarantee of future results - see the disclosures in the footer and the methodology.