Annual Countercyclical Rebalancing
Restore the original allocation by trimming winners and buying laggards
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 98%
Murray presents annual rebalancing as a behavioral antidote to the common habit of leaving a cold investment for whatever is currently hot. Begin with the portfolio's original target allocation and compare it with current weights once a year. Assets that have surged will sit above target, while laggards will sit below it. Trim the winners and redeploy into the underweight allocations, restoring the plan. This systematically does the opposite of selling low to buy high. The method does not require forecasting which asset will lead next; its value comes from disciplined return to the chosen allocation and reduced emotional switching. Murray also argues that frequent portfolio changes tend to lower returns, making a scheduled annual process preferable to continual reaction.
Origin
Murray connected annual rebalancing to repeated DALBAR findings that investors lose much of their funds' returns by switching between cold and hot investments.
Core principles
- 01Return to the original plan on a regular schedule
- 02Trim assets after unusually strong performance
- 03Redeploy capital into lagging allocations
- 04Counter the instinct to sell cold assets and buy hot ones
- 05Reduce unnecessary portfolio turnover
How to run it
- 1
Preserve the target allocation
Write down the portfolio weights established by the long-term plan. Use them as the baseline for every review.
Pro tip Keep the rationale for each target beside the percentages.
Watch out Do not let recent performance silently redefine the target.
- 2
Review once a year
At the annual review, compare each current weight with its target. Separate this scheduled process from daily market commentary.
Pro tip Use the same review month each year.
Watch out Constant checking can turn disciplined rebalancing into market timing.
- 3
Trim the outperformers
Reduce positions that have risen above their target weights. Sell only enough to restore the intended balance.
Pro tip Account for taxes and transaction costs before choosing which account to rebalance.
Watch out Do not interpret recent strength as proof that an overweight should become permanent.
- 4
Fund the laggards
Move the proceeds into allocations that have fallen below target. This reverses the instinct to abandon what has recently gone cold.
Pro tip Use new contributions to fill underweights before selling when practical.
Watch out Confirm the asset still belongs in the plan rather than buying a genuinely invalid holding mechanically.
- 5
Return to inactivity
After restoring the allocation, leave the portfolio alone until the next scheduled review unless the underlying financial plan changes.
Pro tip Record the completed weights and next review date.
Watch out Adding discretionary trades between reviews reintroduces the behavior the process is designed to remove.
In the wild
Murray says great advisors rebalance annually. They return to the original allocation, remove some capital from assets that have recently performed exceptionally well, and redeploy it into allocations waiting below target.
→ The portfolio counters the investor's natural tendency to sell low and buy high.
An illustrative saver finds equities above target and another allocation below target at the annual review. Instead of chasing the equity rally, the saver directs new contributions to the underweight allocation until the original balance is restored.
→ The plan is restored with less turnover and without making a forecast.
Common mistakes
Chasing the hot allocation
Switching from a cold holding into a recent winner repeatedly converts the portfolio into a sell-low, buy-high process.
Rebalancing continuously
Frequent changes can become disguised market timing and create unnecessary turnover.
Ignoring a changed plan
Rebalancing should restore a still-valid allocation. A material change in goals or liabilities requires revisiting the target first.
Is it for you?
Best for
It is best for diversified long-term portfolios with stable target weights and investors prone to chasing recent winners.
Not ideal for
It is not ideal when the investor's goals, liabilities, tax position, or appropriate target allocation have materially changed.
From the transcript
“the more often you change the portfolio for whatever reason, the lower your return will go.”
“what they're doing again and again and again is selling low to buy high”
“almost all of the great advisors are rebalancing annually.”
From the episode
Financial Advisor Nick Murray: Masters in Business (Audio)
Nick Murray