Burton Malkiel, the renowned economist, fundamentally changed the way we think about investing with his groundbreaking book A Random Walk Down Wall Street. First published in 1973, this classic work has become a bible for many investors.
Malkiel’s core idea is simple: it is nearly impossible to consistently beat the stock market. He argued that stock prices follow a “random walk,” like a drunk man weaving down the street, meaning their future movements are inherently unpredictable.
Malkiel argues that anyone who tries to sell you on stock picking is full of baloney. Even most professional fund managers, with access to the smartest people and the best data, can’t do it. Instead, he advises investors to simply buy a stock market index fund, contribute to it regularly, and hold for the long term.
If this sounds familiar, it’s because this approach is the basis of our Blockchain Believers Portfolio. (Our contribution was to simply add a little bit of crypto to the mix.)
There’s one way in which our approach differs, however: he was a big fan of regular rebalancing, and we are not. Which approach has been better for crypto investors? In this guide, we’ll run the numbers.
What is Crypto Rebalancing?
Think of your total investment portfolio like a pie. In a pie recipe, you have certain ratios of flour, sugar, butter, and so on.
But unlike pie ingredients, your investments grow at different rates. Over time, the ratios get out of whack: the pie that was originally 10% sugar is now 20% sugar.
If your crypto assets grow too much, in other words, they take up a larger portion of your portfolio, increasing your risk. By rebalancing, you sell some of the best-performing assets and buy others to maintain your original ratios. (If you now have 20% crypto, you have to sell half to get it down to 10%.)
If your crypto grew quickly, should you sell some to maintain your original ratios?
Put another way, rebalancing involves regularly adjusting your portfolio to maintain your desired asset allocation (your ratio of ingredients). You can rebalance annually, quarterly, or on some other schedule.
The advantage of crypto rebalancing: You keep your investments within your “ideal” percentage, so you don’t take on more risk. If crypto goes to zero tomorrow, you’ve lost at most 10% of your overall portfolio.
The disadvantages of crypto rebalancing: When you sell your crypto, you’re taxed on any investing gains, which can have a huge impact on your overall wealth. Also, rebalancing takes a fair amount of effort: you’ve got to make the calculations, make the trades, and remember to do it.
So: should you regularly rebalance your crypto portfolio? We ran the numbers.
Rebalancing vs. Not Rebalancing
As regular readers know, we track three different portfolios:
- Non Believers (65% stocks/35% bonds): Traditional investors, with no crypto investments. (This is our “control group.”)
- Baby Bitcoin Believers (65% stocks/32.5% bonds/2.5% bitcoin): Just a small slice of the pie invested in bitcoin.
- Big Believers (65% stocks/25% bonds/5% bitcoin/5% Ethereum): Up to 10% invested in quality crypto assets.
We calculated our five-year returns on these three portfolios, with a $10,000 initial investment and $100 invested per month. First, the results without rebalancing:
Compare that to the same investment strategy, with annual rebalancing:
Here's what we found:
- Dedicating a small slice to crypto is still the winning strategy. Even with rebalancing, the “believers” still outperformed the “non believers” by a significant margin.
- Rebalancing reduces returns. This is easy to understand: if you sold part of your crypto every year, you gave up your best-performing investment. Perhaps you reduced risk, but you certainly reduced reward.
- Taxes make rebalancing even worse. Because everyone’s tax situation is different, we didn’t include taxes in our rebalancing calculation, so your actual performance would be even worse.
Should I Rebalance My Crypto Portfolio?
Our goal is to make intelligent crypto investing available to everyone. That means making it easy.
So our strategy remains steady-drip investing: we simply buy and hold the same amount each month, regardless of price. To get started, you need to invest a little time in setting up the accounts and your monthly withdrawals, but then you let it run on autopilot. Set it and forget it.
Rebalancing adds significant hassle for investors. You have to mark your calendar. Run the calculations. Buy and sell the appropriate assets. Transfer between crypto wallets and brokerage accounts. Calculate taxes. It’s all wonky and difficult.
It's also psychologically difficult to sell your bitcoin when it's your best-performing asset. You’ll be forever second-guessing yourself: “Why did I sell half my crypto?” (Of course, the price of bitcoin may be plummeting, but that means you may have to buy more, which is even more difficult!)
If all this yielded significantly better returns, maybe rebalancing would be worth it. But over the past five years, the rebalancing returns have been worse.
Rebalancing is appropriate for those who never want to risk more than 10% in crypto, no matter how much their crypto investments grow. If that’s you, then mark your calendar and have fun.
For the rest of us, the winning approach has been five words: set it and forget it.
Investor Takeaway
We’re here to make intelligent crypto investing as easy as possible, for as many people as possible. So we buy, hold, and don’t worry about rebalancing.
That may mean the pie turns out a little sweeter or richer than we wanted. But hey, it's still delicious. It's pie.
