New research is calling into question the longstanding wisdom of rebalancing your investment portfolio.

As you may know, rebalancing is the practice of periodically bringing the stock/bond allocation of your portfolio back into alignment with your intended allocation. The idea is that if a trustworthy asset allocation process finds that an 80/20 stock/bond allocation is appropriate for you, and if, in fact, that’s how you start a given year, it’s highly unlikely that you’ll end the year that way.

For example, depending on how the markets perform, your stocks may grow in value while your bonds hold steady, leaving you with an 88/12 portfolio. To rebalance, you would sell some stocks and buy some bonds to get back to the intended 80/20 allocation.

Rebalancing is usually viewed as a process that keeps the risk profile of your portfolio as it should be.

However, a new study, conducted by Duke University Professor Campbell Harvey and four members of a London-based investment firm, found that rebalancing when the market is in a longer-term up or down trend actually adds risk.

That’s because, when you rebalance, you take money away from the better-performing asset class and reinvest it in the poorer-performing one. If those two asset classes’ relative strength persists after the rebalancing, as they often do, you’ll end up worse off than if you had not rebalanced.

To illustrate, consider a traditional portfolio whose default allocation is 60% in stocks and 40% in bonds. At the end of last year, the stock portion represented well more than 60%, since U.S. equities gained more than 30% in 2013 while bonds fell. Therefore, any year-end rebalancing transferred money away from stocks into bonds.

Yet that has turned out to be a costly move, since stocks this year, just as in 2013, have outperformed bonds.

Makes perfect sense, except for the fact that it’s impossible to predict which way the market will move in any given year. What if, after 2013’s remarkable run, 2014 turned out to be a losing year? Choosing to not rebalance would have been the costly move.

This new research flies in the face of the more common perspective that rebalancing is a way of managing risk, and the more common sense perspective that if 80/20 was the right asset allocation for you 12 months ago, it’s probably the right asset allocation for you now.

In fact, the article acknowledged that, “trends don’t last forever. And when they reverse, rebalancing does reduce risk.”

All of this reminds me of a minor stir Vanguard Founder Jack Bogle created a couple of years ago when he seemed to question the wisdom of rebalancing.

What he actually recommended was not obsessing with bringing your portfolio back to its ideal mix if it veers off by one or two percentage points. Instead, he said it’s best to set some thresholds. For example, when your portfolio is out of alignment by five percentage points, then rebalance.

We continue to believe rebalancing once a year makes sense for most readers, but we also agree with Bogle’s advice not to obsess over small variances.

What are your views on rebalancing?