This article examines the implications of various portfolio rebalancing methodologies and includes test results from a series of simulation models.

Investors and fiduciaries would like to know the probable consequences of portfolio management elections prior to their implementation. This is especially the case for decisions to incur voluntarily extra costs and taxes by electing to rebalance the portfolio to its asset allocation targets. The literature discussing rebalancing is extensive. Various authors claim that rebalancing elections can control portfolio risk, enhance returns, or both. However, there are few studies examining the economic consequences of rebalance elections for well-diversified portfolios operating with realistic costs and differential tax rates for ordinary and capital gains income. Even fewer studies consider rebalancing elections under both accumulation and decumulation regimes. This paper, following a review of the literature, examines the output of a simulation model designed to test the marginal effects of rebalance elections on terminal wealth, aggregate consumption possibilities, and downside risk measures. The paper concludes that if terminal wealth has value because of bequest preferences or remainder interest considerations, the investor will select rebalance strategies to augment the utility of final dollar values. If, however, the investor does not have these preferences, the unspent money may merely represent lost consumption opportunities.