Most investors think of rebalancing as a path to better returns. Meketa Investment Group argues they are thinking about it wrong. In a new whitepaper, Rebalancing1, contributors Frank Benham, CFA, CAIA, and Jackson Shaw make the case that portfolio rebalancing is fundamentally a governance tool, a mechanism for maintaining fidelity to the investment policy statement rather than a lever for outperformance.
"The purpose of rebalancing is fidelity to policy, not higher returns," write Benham and Shaw. "Rebalancing keeps a portfolio aligned with the objectives, risk tolerances, and constraints set out in the investment policy statement. Any effect on return tends to be a byproduct of that discipline rather than its goal." The paper frames this distinction not as a technicality but as a foundational shift in how investors ought to evaluate every decision about when and how aggressively to rebalance.
Why Portfolios Drift, and Why It Matters
Portfolio weights drift as a natural consequence of different asset class returns. Left unmanaged, that drift produces a risk-return profile that may no longer reflect what the investor intended. Benham and Shaw illustrate the point through a hypothetical 60/40 portfolio spanning January 1979 through May 2026. Equities exceeded 65% of the portfolio in 85% of months and climbed above 70% in 66% of months. The message is unambiguous: markets will do this, and an unmanaged portfolio steadily becomes something other than what was planned.
The paper is also careful to distinguish rebalancing from market timing. Active rebalancing returns a portfolio toward an agreed-upon asset allocation in response to market-induced changes. Market timing, by contrast, anticipates a market shift and repositions in advance. Academic research has consistently shown that successful market timing is very difficult to execute with sufficient accuracy to justify the costs.
The Evidence on Frequency and Cost
"The clearest and most consistent benefit of rebalancing has been risk control," Benham and Shaw state. Across every transaction cost assumption tested, rebalanced portfolios held volatility well below the buy-and-hold alternative. Buy-and-hold did produce the highest return over the full period. However, "that higher return came at the cost of a risk posture the investor did not choose."
Among periodic rebalancing strategies, annual rebalancing delivered the best cost-adjusted results. Monthly rebalancing proved the most expensive relative to its benefit. "Among the frequencies tested, monthly rebalancing was by far the most sensitive to transaction costs, which illustrates how higher costs fall disproportionately on more frequently traded strategies."
Range-based approaches tell a similar story. Testing 5% and 10% tolerance bands with target, midpoint, and endpoint rebalancing rules, the authors find that the 10% midpoint approach delivered the highest cost-adjusted annualized return among all range-based strategies. "Wider bands generally reduced the number of rebalancing actions and helped preserve cost-adjusted returns as transaction costs increased." The trade-off is that wider bands permit more volatility. However, every range-based method still held substantially less volatility than buy-and-hold.
Multi-Asset Portfolios: Exposures Over Weights
For complex institutional portfolios, Benham and Shaw argue that line-item precision is a distraction. "The goal of rebalancing is to keep those aggregate exposures within tolerance, rather than to hold each individual allocation at its precise target." What matters is the portfolio's aggregate sensitivity to equity markets and interest rates, not whether each constituent sits exactly at its assigned weight. Private equity, for instance, carries equity-like risk with a higher beta and lagged pricing. An overweight to private equity is, in substance, an overweight to equity risk.
The Illiquidity Problem
The paper's most consequential section confronts portfolios with large private market allocations. "Investors generally manage private market exposure over multiple years through commitment pacing, meaning the timing and size of new commitments together with the natural flow of capital calls and distributions." Private assets cannot be traded to target on demand, so traditional rebalancing bands serve as pacing guardrails, not trading triggers.
The denominator effect sharpens the problem during market stress. When public valuations fall quickly while reported private marks lag, private assets appear to represent a larger portfolio share even though their underlying value has also fallen. Investors who responded to apparent overweights by selling public equities during the post-pandemic drawdown often missed the subsequent recovery. "No rebalancing rule can satisfy both objectives at once," the authors state. The most defensible response is anticipating this conflict in the IPS before it arises.
Five Key Takeaways for Advisors and Investors
- Rebalancing is a risk management discipline, not a return-enhancing strategy. Its primary purpose is keeping the portfolio within its intended risk posture.
- Annual rebalancing consistently delivered the best cost-adjusted Sharpe ratio among all periodic strategies tested.
- Range-based approaches with wider bands reduce trading frequency and costs, provided drift stays within policy tolerance.
- In multi-asset portfolios, total factor exposures matter more than individual component weights. Rebalancing effort is better directed toward deviations that shift aggregate risk.
- Large illiquid allocations fundamentally alter rebalancing mechanics. Investment policy statements should address the denominator effect explicitly and preauthorize defined tolerance for temporary deviations.
Footnote:
1 Benham, Frank, and Jackson Shaw. "Rebalancing." Meketa Investment Group, October 2026, https://meketa.com/leadership/rebalancing-2/.
