Asset prices rise and fall. Rebalancing is a strategy for bringing a portfolio back toward its planned allocation. But when should you do it? This article discusses rebalancing and a 13-year backtest that compares months, returns, risks and some features of mutual funds and ETFs.
What Is Portfolio Rebalancing?
Rebalancing means adjusting portfolio holdings to restore a chosen allocation. Because asset prices change, the portfolio can drift away from its plan. Rebalancing can help restore the intended balance and manage risk, although it does not eliminate risk.
What Is Backtesting?
Backtesting applies a strategy to historical data to estimate how it would have performed. It can help investors examine a strategy’s historical returns and risks, but it cannot show what will happen in the future.
A Rebalancing Example: Gold vs. Diamonds
Suppose a portfolio starts with 30% in gold and 70% in diamonds. If diamond prices rise, the allocation might become 20% gold and 80% diamonds. Rebalancing would involve selling some diamonds and buying gold to return to the original 30% and 70% allocation. This is an illustration, not a recommendation to invest in either asset.
Variables Used in the Test
The test uses historical data over 13 years, from January 2012 through June 2025, to compare annual rebalancing strategies. The article lists these measures:
- Total return.
- Average annual return.
- Volatility.
- Maximum drawdown.
- Sharpe ratio.
Backtest Results: Which Month Was Best?
The backtest is presented as a way to compare possible results when rebalancing in different months.
How the Backtest Was Set Up
The test simulates rebalancing once a year, in each month from January through December, and compares the results.
Examples Using QQQ and Global Stocks
The article compares two broad asset exposures: QQQ, which tracks the Nasdaq 100, and global stocks represented by URTH. It also says it simulates investing through mutual funds in Thailand.
Returns by Month
The article reports that returns did not differ significantly across months and were similar for the tested periods and assets.
Backtest Summary
The article concludes that the choice of month had no significant effect on overall returns in its test. It emphasizes following a consistent rebalancing plan. The result depends on the test assumptions and should not be generalized to all portfolios.
Returns and Risk: QQQ vs. Global Stocks
Different asset types can have different risks and returns.
Comparing QQQ and Global Stock Returns
The test reports higher total returns for QQQ (Nasdaq 100) than for global stocks over the period examined.
Comparing Risk (Maximum Drawdown)
The article reports that QQQ had higher volatility and maximum drawdown than global stocks in its comparison.
Pros and Cons of Each Investment Type
QQQ may offer higher returns but also has higher risk in the article’s historical comparison. Global stocks were less volatile in that test and may suit investors with lower risk tolerance, depending on their goals and circumstances.
Mutual Funds vs. ETFs: Pros and Cons
Mutual funds and ETFs each have potential advantages and disadvantages.
How Fees Affect Returns
Fees can affect long-term returns. Even a fee that looks small over a short period can lead to a difference over time.
A Tax Feature of Mutual Funds
The article says investors do not pay tax on trades made inside a mutual fund. Tax treatment depends on the investor, product, account and applicable law; check current rules.
Potential Advantages of ETFs
The article says ETFs may have lower fees than mutual funds and can offer more flexibility in trading. Costs and features vary by product.
Backtest Summary and Points to Remember
Investing is complex, so it is important to understand the factors involved.
Summary of the Test
In this test, the choice of rebalancing month did not significantly affect returns. QQQ returned more than global stocks but had higher risk. The article says mutual funds had higher fees than ETFs but a tax advantage; this comparison is product- and jurisdiction-dependent.
Cautions About Backtest Results
Backtests cannot predict future results. Markets change, and investing involves risk. Review relevant information carefully before making an investment decision.
Further Points About Investing
A long-term plan and consistent investing habits can be useful. Diversifying across assets may reduce overall portfolio risk, but cannot remove it.
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