Like many quantitative investors, Validea CEO John P. Reese uses a strict rebalancing approach to portfolio management. But just how often should you rebalance your portfolio? Reese says it may depend on the type of strategy you are using.

“Rebalancing forces a disciplined buy/sell methodology into the investment process, removing emotions and biases that oftentimes hurt performance,” Reese writes in his latest column for Canada’s Globe and Mail. “Ben Graham – the man known as the ‘father of value investing’ – would have considered rebalancing (even on an annual basis) speculative in nature, but when a stock’s fundamentals change and there are better opportunities in the market, having a systematic way to get those into the portfolio is important over time.” He looks at how two of his portfolios have behaved very differently using certain rebalancing time periods. The first picks stocks using a model Reese developed based on a strategy that little-known accounting professor Joseph Piotroski outlined in a 2000 study. “A 20-stock, monthly rebalanced U.S. portfolio picked using my Piotroski-based model, which I started tracking in 2004, has been the worst performer of my 12 20-stock Guru Strategies when using a monthly rebalancing interval,” he writes. “When we extend the rebalancing period to a full year, however – the time frame Prof. Piotroski used in his study – the results are much different. The Piotroski approach then becomes one of my better performers, having returned 127 per cent since inception in early 2004 versus 81 per cent for the S&P 500.”

Reese’s Motley Fool-inspired approach – based on a strategy outlined by Fool co-creators Tom and David Gardner – is a different story, however. “A 20-stock annually rebalanced portfolio picked with the strategy is up just 57 per cent since its 2003 inception, significantly lagging the S&P,” Reese says. “A quarterly rebalanced version is up 153 per cent, however, well ahead of the index. A monthly rebalanced version? It’s up 276 per cent compared to 107 per cent for the S&P 500 since mid-2003.”

Reese talks about why these strategies may be behaving differently when using particular rebalancing periods. He also talks about the mindset one needs to use a strict rebalancing system. “Having the right investor mindset is imperative,” Reese says. “If you are the type of investor who gets emotional and has difficulty staying disciplined, certain rebalancing plans might be difficult for you to follow. Understand yourself and find the rebalancing period best suited for you.”