Why should you rebalance your portfolio? Jake gives a good answer:
"Empirical evidence has shown that disciplined rebalancing tends to reduce risk and enhance return."
This is true- but the problem is the use of the word risk. When reading papers on portfolio theory, risk is almost always measured by a thing called beta.
Beta is a statistical measure of the volatility of a stock versus the overall market.
Volatility gets used as a proxy for risk in studies because academics need a number for their calculations that is objective, can be looked at historically, and extrapolated into the future.
But just because it's easy to measure doesn't mean it's telling you the right thing.
I would argue that volatility is not the same thing as risk.
In my opinion, risk is the permanent loss of capital. That's what I really care about.
Think about this: A stock that goes from $60 to $90 is likely to have the same statistical volatility as a stock that goes from $60 to $30. But which was riskier? "Empirical evidence" would say that they were both equally risky, but we all know that it's important to describe these two situations as being very different. I don't care if my stock goes up and down a lot, as long as it ends up at $90 instead of $30.
The risk is that it ends up at $30, not the path it took to get there.
Therefore, I tend to think focusing on portfolio rebalancing as asking the wrong question. Portfolio rebalancing will lead you to sell companies that have been outperforming (which is likely due to excellent execution) and buy companies that are underperforming. This is a bit like benching your best basketball player because you don't want to score too many points all at once.
I may be guilty of 'anchoring bias' due to the fact that I've never rebalanced my portfolio in seven years and that has worked out really well for me- so take my thoughts with a grain of salt. But it's worth thinking about for yourself if you're ok with more volatility in pursuit if higher returns.