The Rebalancing Bonus: Calendar vs. Threshold
The Rebalancing Bonus: Calendar vs. Threshold
Stop rebalancing on “January 1st.” Why setting percentage “tripwires” (Thresholds) generates superior alpha by forcing you to buy fear and sell greed.
Executive Summary
- The Maintenance Fallacy: Amateurs think rebalancing is just “tidying up.” Professionals know rebalancing is a systematic “Buy Low, Sell High” machine. It forces you to sell what has become expensive (Greed) and buy what has crashed (Fear).
- Calendar (Lazy) vs. Threshold (Smart):
Calendar: Rebalancing every Quarter or Year. It ignores market conditions.
Threshold (Opportunistic): Rebalancing only when an asset drifts by X% (e.g., 5% absolute deviation). If the market crashes 20% tomorrow, the Threshold triggers an immediate buy, while the Calendar waits 3 months and misses the bottom. - The Rebalancing Bonus: By using Thresholds, you capture volatility spikes. Studies show this method can add 0.5% – 1.0% annual alpha compared to calendar methods, purely from the mathematical advantage of timing the swings.
The Tax Friction
Warning: Every rebalance is a taxable event in a taxable account.
1. Always use “Inflows” (new cash) to rebalance first (buy the underweight asset).
2. Rebalance inside IRA/401(k) where trading is tax-free.
3. In taxable accounts, allow wider thresholds (e.g., +/- 10%) to minimize capital gains tax.
Mechanic: Setting the Tripwires
Threshold
“If Drift > 5%”
Responsive
Market Driven
Bonus Alpha
Volatility Capture
Discipline
Hard Psychology
Simulation: Volatile Year (Calendar vs. Threshold)
Scenario: Market Crash (-20%) then Recovery (+20%)
| Feature | Calendar (Time-Based) | Threshold (Drift-Based) |
|---|---|---|
| Trigger | Specific Date (e.g., Dec 31) | Asset Deviation (e.g., +/- 5%) |
| Market Crash | Does nothing until scheduled | Buys aggressively at the bottom |
| Monitoring | Passive (Set and Forget) | Active (Requires Software/Alerts) |
“Threshold rebalancing requires you to do the hardest thing in investing: Buy when the news is terrible (hitting the lower band) and sell when everyone is celebrating (hitting the upper band).”
Essential Resources
INTERNAL
BMT Playbooks