Key takeaways
- A 60/40 last set to target at the October 2007 peak had drifted to 47/53 by October 2008 in Shiller's monthly real total-return data. Rebalancing meant moving 13.3 percentage points from bonds into stocks.
- That October 2008 rebalance was 4.3% behind the frozen portfolio five months later at the March 2009 low, and still only 0.7% ahead after three years. By June 2026 it was 21.1% ahead.
- The same trade in March 2020 was 3.3% ahead within a year and 6.5% ahead after five, and was never behind at any month-end — the S&P 500 fell 33.9% in 23 trading days.
- Almost none of that payoff came from buying cheaply. From October 2008 to June 2026, real stock total returns ran +587% against -3.3% for 10-year Treasuries. The gap is the 13.3-point shift.
- Acting a month early mattered more than acting at all: the same rebalance done in September 2008 rather than October did not move permanently ahead of the frozen portfolio for 52 months.
It's the end of October 2008. Lehman Brothers failed six weeks ago. Equities are down 30% from the peak, and the 60/40 you chose isn't a 60/40 any more — the stock side collapsed while the bond side gained, so you're nearer 47/53 than the 50/50 you might have guessed.
Your rule says buy shares. Everything else says don't.
Which do you follow?
Here's what happened to the person who followed the rule. Five months later, at the March 2009 low, they were 4.3% behind the person who froze. After a year, 0.8% ahead. After three years — three whole years — still only 0.7% ahead.
Today, in June 2026, they're 21.1% ahead.
Now run the same decision in March 2020. That trade was 3.3% ahead inside a year and 6.5% ahead after five, and it was never once behind at any month-end. Same rule, same portfolio, an entirely different experience of holding it.
What separates the two has nothing to do with the strategy. It has everything to do with how much further the market fell after each decision was taken — the one thing neither investor could know at the time. That makes this a poor question to settle with a rule, and a good one to answer with a spread of outcomes.
October 2008: the rebalance bought five more months of falling, then three years of almost nothing
Real equity total returns peaked in October 2007. Twelve months later they were down 38.0%, while 10-year Treasuries had returned +6.3% in real terms. The 60/40 was worth 79.7% of its peak value and had drifted to 46.7% equities, past the halfway mark, because the bond leg gained while the equity leg fell apart.
Rebalancing there meant shifting 13.3 points of the portfolio out of Treasuries and into stocks, in the month after Lehman failed. Then the market fell another 19.3% in real terms while Treasuries added a further 11.8%.
By March 2009 the rebalanced portfolio was 4.3% below the frozen one. Measured from the October 2007 peak, it was down 25.7% against the frozen portfolio's 22.4%. It took ten months to move permanently ahead, and the lead stayed thin for years: +0.8% after one year, +0.7% after three. Only at the five-year mark did it reach +6.0%. Today the gap is +21.1%.
Read that row twice and you get two honest headlines. Rebalancing in October 2008 paid 21%. Rebalancing in October 2008 paid nothing for three years and cost you 4% first. Both come from the same series of numbers. Which one you'd have lived through depends on how long you could hold.
March 2020: the same trade paid quickly because the crash lasted 23 trading days
The 2020 episode barely qualifies as the same kind of event. The S&P 500 peaked at 3,386.15 on 19 February 2020, bottomed at 2,237.40 on 23 March — 33.9% down in 23 trading days — and closed back above the old high on 18 August, 148 calendar days after the low.
At monthly resolution the drawdown looks much milder. Real equity total returns fell 18.9% from the January 2020 peak, Treasuries gained 8.7%, and the 60/40 drifted only to 52.8% equities. Rebalancing meant a 7.2-point shift, roughly half the size of the 2008 trade. On daily prices it briefly looked like the harder version: after a 33.9% equity fall, a 60/40 with an unchanged bond leg sits at 49.8% stocks. That was true for about a week.
The payoff arrived almost immediately and never reversed: +3.3% after one year, +4.4% after three, +6.5% after five, and +7.7% by June 2026. The rebalanced portfolio's worst month was the month of the decision itself. The frozen portfolio's worst month wasn't March 2020 at all — it was October 2022, when stocks and bonds fell together.
Rebalancing in a crash: the month mattered more than the decision
The chart above shows those gaps at four horizons in each episode. It understates how much of them was luck.
Suppose you'd acted a month earlier. Rebalance in September 2008, when equities were only 23% off their peak, and you'd have been 4.2% behind at the March 2009 low, still behind after one year (−1.4%) and after three (−1.6%), and you wouldn't have moved permanently ahead for 52 months. Your lead today would be +10.7%, half the October figure. Rebalance instead in March 2009, at the low, and you'd have been 10.7% ahead within a year and 42.5% ahead today.
One month either side of October changed the three-year result from −1.6% to +2.9%. Nothing in the 2020 grid comes close: the March, April and May 2020 decisions all land between +2.3% and +3.3% after a year.
A tracker that shows drift continuously — LedgerTouch does this, and so does a spreadsheet you update once a month — tells you the weight you're holding. It can't tell you whether the next leg down has already happened.
Nearly all of the payoff from buying during a drawdown came from bonds after it
This is the part that should shape how much weight you give these two episodes.
So what exactly were you rewarded for? Not for buying cheaply. The rebalanced portfolio wins for one reason: it holds more equities than the frozen one, and equities beat bonds over the measurement window. Nothing about the crash itself contributes.
From October 2008 to June 2026, real stock total returns compounded to +587% while real 10-year Treasury total returns came to −3.3% — nearly eighteen years of holding an asset that lost purchasing power. From March 2020 to June 2026 the split is starker still: +136% for stocks against −32.3% for Treasuries, most of that bond damage inflicted by the 2021–2023 inflation.
Shorten the window and the effect shrinks with it. Over the three years from October 2008, stocks returned 27.6% real and Treasuries 20.6% — a 7-point gap, which is why the rebalanced portfolio was ahead by only 0.75%. So the reward for rebalancing into a crash is really the reward for having held more equities through a long bull market and a long bond bear market. If you don't want that exposure, declining it is reading this evidence correctly rather than ignoring it.
The counter-argument to rebalancing in a crash: it may keep falling
The serious objection has little to do with whether rebalancing works. It's that the trade concentrates risk into exactly the moment when the range of outcomes is widest, and the October 2008 numbers show what that felt like. You'd have bought before a further 19.3% real decline, deepened your peak-to-trough loss from 22.4% to 25.7%, and waited three years for a lead of less than one percentage point. How long would you sit with that?
The bond leg deserves its own scepticism. All of the above uses Treasuries, which rallied hard as equities fell. A real-world 60/40 usually holds a broad bond fund with corporate credit in it, and corporate credit didn't rally. Moody's seasoned Baa corporate bond yield rose from 7.31% in September 2008 to 9.21% in November — yields up means prices down — while the 10-year Treasury yield fell from 3.69% to 3.53% over the same two months, and to 2.42% by December.
So if your bond sleeve was falling alongside your shares, your portfolio drifted less, the rebalancing trade was smaller, and the asset you'd sell to fund it wasn't sitting on a gain.
There's also the plain argument from sequence. Both episodes come from a period in which US equities recovered and went on to new highs. A method that depends on that ending is really a description of the sample it was drawn from.
The trade was most expensive exactly when it looked most attractive
Costs get waved away in this debate. In a crash they aren't small.
Vanguard's 2022 rebalancing paper models transaction costs as a function of volatility rather than a fixed number, and finds they "are not static through time but are sensitive to market volatility and can increase tenfold during periods of market turmoil." The same paper notes that in turbulent markets you may rebalance in one direction and then have to reverse the transaction.
Tenfold is the figure to hold on to: the trade you're modelling at ordinary spreads isn't the trade you'd actually get. A Federal Reserve FEDS Note by Steven Sharpe and Alex Zhou records investment-grade corporate bond transaction costs rising from around 30 basis points per dollar of principal traded in February 2020 to nearly 90 basis points in mid-March, with block trades going from 24 basis points to over 150 by 23 March — the day of the low. A BIS bulletin by Sirio Aramonte and Fernando Avalos found some of the largest investment-grade and high-yield bond ETFs trading at discounts to net asset value in excess of 5% in mid-March. Selling the bond side to buy the equity side was, at that moment, considerably worse than the index prices implied.
Tax is the other leak, and it only bites outside a sheltered account. Rebalancing after an equity crash usually means selling the asset that went up. Under IRS Topic 409, long-term gains are taxed at 0%, 15% or 20% depending on income, and losses can only offset ordinary income at $3,000 a year. Selling 13.3 points of appreciated Treasuries in a taxable account in 2008 realised a gain in the same year your portfolio lost a fifth of its value. In an ISA, a 401(k) or a SIPP, that consideration disappears.
Roughly seven in ten people did nothing, and most of those who traded sold equities
The behavioural half of this is often asserted and rarely measured. In 2020 it was measured.
Giglio, Maggiori, Stroebel and Utkus matched a survey of Vanguard clients to their actual daily trading through the crash (NBER working paper 27272, May 2020). Between 31 January and 31 March, 67% of the optimists, 73% of the neutrals and 70% of the pessimists made no portfolio change at all. Among the minority who did trade, every group moved the same way — out of equities. At constant prices, optimists actively cut their equity share by 1.05%, neutrals by 0.98%, pessimists by 0.63%. Traders who had been most optimistic in February took their equity weight from 68% down to 64% by the end of March.
That sits awkwardly beside a second Vanguard measurement, quoted in our piece on risk tolerance and risk capacity: across more than five million retail households in the first half of 2020, 62% of those who traded moved money into equities. Both figures are Vanguard's and both are right. They count different things. One is a headcount of households and the direction of their cash across six months; the other is the change in a surveyed group's equity share, at constant prices, across two. A purchase too small to offset the drift still shows up as a fall in equity weight.
Two things follow. Rebalancing into the drawdown was a minority act, and the average trade went the other way. And, more usefully, the authors point out that "'not trading' to rebalance a portfolio after market changes is also an endogenous decision". Freezing is a position, not the absence of one. It quietly lowers your equity weight and locks in a more defensive portfolio at the worst prices of the cycle. Whether that's a bug depends on whether your original 60/40 still described the risk you could carry. Our guide to the behaviour gap covers what that pattern has cost in aggregate.
The uncomfortable implication cuts against the rebalancer. Imagine you reach for the trade only because a rule tells you to, then abandon the rule at the March 2009 low when it's 4.3% underwater. You've engineered the worst of both, and the 2008 path punished exactly that.
If you want to check any of this yourself
Stock and bond returns both come from Robert Shiller's monthly US dataset, the spreadsheet behind Irrational Exuberance, updated through July 2026. The equity leg is his real total-return series for the S&P Composite, which includes reinvested dividends. The bond leg is his real total-return series for 10-year US Treasuries, which includes coupons. Both are inflation-adjusted.
One convention matters more than the rest. Shiller's monthly price is the average of that month's daily closes, not the month-end close. His figure for March 2020 is 2,652.39, exactly the average of the 22 daily S&P 500 closes that month in the St. Louis Fed's series. So the data smooths a fast crash: it shows March 2020 as an 18.9% real equity drawdown when the daily index touched −33.9%. For October 2008 the smoothing matters far less, because that decline was spread over 17 months.
The experiment is your actual choice. Assume the portfolio sat at exactly 60/40 at the market's last peak, then let it drift with real returns. At the decision month, compare two portfolios: one moved back to 60/40, one left untouched. Neither is rebalanced again, neither receives contributions, and no trading costs or taxes are charged to either. Those omissions all favour rebalancing, which is why the cost section above exists.
Two crashes that both recovered can't tell you about one that doesn't
The limits here are severe and worth stating without hedging. Two episodes is not a sample. Both are US. Both ended in recoveries that were, by historical standards, fast and complete. The bond leg is 10-year Treasuries rather than a broad bond fund, and 2008 shows how much that choice matters. And the whole result is a single historical path, not a distribution.
Japan is the standing counterexample. The Nikkei 225 closed at 38,915.87 on 29 December 1989. It fell to 7,054.98 by 10 March 2009, 81.9% below the peak, and didn't close above the 1989 level again until 22 February 2024 — a gap of 34.2 years. That series is price-only and in yen, so dividends and currency would change the arithmetic for a foreign holder. On a broader measure the wait was longer still: the OECD's monthly share-price index for Japan bottomed 74.5% below its December 1989 level in November 2011 and didn't regain that level until July 2025.
What none of that changes is the shape. Picture someone who kept rebalancing into that drawdown through the 1990s. They were adding to a position that hadn't recovered two decades later, and didn't recover inside an ordinary investing lifetime. Nothing in the 2008 or 2020 data speaks to that case, because neither episode contains it.
What would change the conclusion
Four conditions would flip it.
- If bonds had performed well afterwards. The payoff in both episodes is the equity-minus-bond return over the following years, applied to a 7-to-13-point shift. Over the three years after October 2008 that gap was 7 points and the reward was 0.75%. Over the seventeen and a half years to June 2026 it was 590 points. A post-crash decade that was kind to bonds and unkind to stocks reverses the sign, and the frozen portfolio, which holds more bonds, comes out ahead.
- If the drawdown had more legs than these two did. The September 2008 result is the warning: 52 months before moving permanently ahead, from a decision taken one month too early. In a decline with four legs rather than two, an early rebalance carries a much longer penalty, and the 2008–09 numbers only bound how bad that gets in a recovery that arrived.
- If the account is taxable and the bond leg is sitting on gains. Every figure above is pre-tax and pre-cost. The March 2020 cost data suggests the execution leak alone was measured in tens of basis points, against a first-year payoff of 3.3%.
- If the target weight was wrong to begin with. Rebalancing restores an allocation. It's only worth restoring if the number still reflects what you can hold through another 25% fall. A 60/40 chosen in calm markets and abandoned at the low was never really a 60/40. That question sits upstream of this one, and it's separate again from how often to rebalance in ordinary markets.
So the thing to watch during a drawdown isn't the index. It's your weight — how far the portfolio has actually drifted, whether that's 3 points or 13, and whether the mix you're left with is one you can hold if the market falls another 20% from here.
The October 2008 investor who rebalanced and held ended 21.1% ahead of the one who froze. The one who rebalanced and then capitulated at the March 2009 low took the 4.3% shortfall and none of what followed. Which of those two would you have been?