Rebalancing

Why rebalance

Risk control. Without rebalancing, a long bull market in stocks will gradually push your portfolio to higher and higher equity percentages, exactly when the case for being cautious is strongest. Rebalancing forces you to trim equity at peaks.

Forced discipline. Rebalancing mechanically implements "sell high, buy low." When stocks outperform, you sell some. When stocks underperform, you buy more with the bond/cash allocation. This is counterintuitive in the moment but works well over long periods.

Behavior-resistant. One of the hardest things in investing is buying during a crash. Rebalancing rules tell you to buy into the drop, taking emotion out of the decision.

How often

Two common rules:

Calendar rebalancing. Rebalance on a fixed schedule — typically annually, though quarterly and semi-annually are also common. Set a date (January 1 is popular), rebalance, done for the year.

Threshold rebalancing. Rebalance whenever any allocation drifts more than X percentage points from target. A common threshold is 5% absolute (so a target of 60% stocks triggers rebalancing when stocks hit 65% or 55%).

Research suggests both approaches produce similar long-run results. Pick one and stick with it.

Tax-efficient rebalancing

Rebalancing in taxable accounts creates capital gains tax events. Three techniques to minimize the cost:

Rebalance in tax-advantaged accounts first. Selling to rebalance inside a 401(k) or IRA has no tax consequences. Use these accounts to do most of the rebalancing work.

Rebalance with new contributions. If your stocks are above target, direct new savings entirely to bonds until the portfolio comes back into balance. No selling required.

Rebalance with distributions. In retirement, choose which asset to sell for withdrawals based on rebalancing needs. If bonds are over-target, sell bonds; if stocks are over-target, sell stocks.

Forced selling in a taxable account should be a last resort, and when it's needed, prioritize selling lots with long-term gains over short-term gains.

Rebalancing vs tax-loss harvesting

Rebalancing triggers gains; tax-loss harvesting captures losses. They sometimes work together: in a down market, you can rebalance by harvesting losses (selling a depreciated position) and buying a similar but not "substantially identical" asset to maintain exposure.

Does it improve returns?

Not necessarily. In strong bull markets with mean-reverting characteristics, rebalancing has historically added a small amount of return (often called the "rebalancing bonus"). In secular trends where one asset class persistently outperforms, rebalancing reduces returns by trimming the winner.

The primary benefit is risk control, not return enhancement. Expect similar long-run returns to a non-rebalanced portfolio — with lower volatility and lower maximum drawdown.

When not to rebalance

• If you're still contributing and your contributions can absorb the drift.
• If rebalancing would create a significant tax bill in a taxable account, and the drift is modest.
• If you're within 5% of target at a scheduled rebalancing date — small drifts usually aren't worth the transaction.

How Horizons uses this

Horizons doesn't automatically rebalance in the engine — your asset values each month are what you've entered plus growth and contributions. But the allocation schedule feature lets you specify the strategy transitions you'd execute on a rebalancing schedule, so the forecast reflects disciplined rebalancing even if you model it as a planned event.