While it does not pay to rebalance too often (every time you do, you incur transaction costs and potentially realize investment gains), it's a good idea to consider doing so after you have harvested tax losses. Too often, people allow their portfolio mix to shift over time, which can be detrimental.
Vanguard in November published a study on asset allocation, and found that for global assets under management in open-end and exchange-traded funds, stock allocations reached 62 percent on Dec. 31, 2006. They then fell as low as 38 percent in 2008, during the financial crisis. After years of solid or strong returns, stock exposure then rose to 56 percent as of Dec. 31, 2014.
"Assets under management," the report said, "tended to drift based on market performance."
That kind of drift could pay off in the short run: If stock market returns are robust for two years in a row, holding off on rebalancing after year one would give you overexposure to a strong asset class. But allowing your exposure to one asset class to get too big can sharply increase the volatility in your returns.
Vanguard analyzed calendar year investment returns from 1926 through 2014 and found that an all-stock portfolio would have delivered an annualized return of 9.7 percent. But returns for at least one year declined 43.5 percent.
A portfolio invested half in stocks and half in bonds would have produced an annualized return of 8.1 percent, or 83.5 percent of the all-stock portfolio. But the balanced portfolio's worst annual return would have been a decline of 22.7 percent, roughly half as poor as the all stock portfolio's worst year.