There are two main ways to determine when to rebalance your portfolio: time- and threshold-based rebalancing. Let’s break down the main differences between these methods to help you choose the best solution.
Time-based rebalancing works on a fixed schedule, usually yearly, making it easy to implement and track. It’s ideal for casual investors who prefer practice and it’s easy to make and maintain. However, this method may trigger unnecessary trades and may miss important shifts in the market.
Threshold-based measurement triggers when shares drift above a set percentage (5-10%). This method requires regular monitoring and attention but usually results in fewer trades overall. It is better suited for active investors who watch their portfolios closely and provides more responsiveness to market movements, although it requires more effort.
Both approaches have clear trade-offs in terms of complexity, cost, and effectiveness. Your choice should match your investment style and how actively you want to manage your portfolio.
While a simple comparison might make threshold-based rebalancing seem complicated, here’s what I’ve found after years of teaching this: the best ‘time’ to rebalancing your portfolio is to do it consistently, once a year. Choose a method that you can stick to that is simple and not be overwhelmed by any other complexities.