A. We have discussed why it's important to rebalance portfolio periodically, however, there are downsides of portfolio rebalancing too, some are highlighted below -
- Additional cost. Rebalancing will not only have transaction cost, but also lead to cost (for taxable accounts).
- Hurt your performance. Rebalance builds on the premise that a investment's return has the tendency to return to mean, so a loser might produce better return and winner might be a loser next time. However, an investment's return to mean could take long time and different investments' regressions to mean could easily have a mismatch.
- Risk and Return trade-off. If your risk tolerance level is high, buy and hold stocks could lead to greater performance for the long term, because history has proven that stocks tend to have better return in the long term. The benefit of rebalance is really in the short term so you could avoid some short term pain, like the one experienced in 2008 crisis. But if you are immune to such pain, there is no need to rebalance!
In short, rebalance your portfolio or not is a personal level decision, for some investors, not doing it might be more beneficial.