Status Quo Bias and Portfolio Drift
Status quo bias describes the inertia coefficient—tendency to maintain current holdings despite changing fundamentals or valuations. Behavioral studies estimate inertia costs 30-80 bps annually through portfolio drift and delayed rebalancing.
Drift simulation over 3-year bull market (S&P +50%, bonds flat):
| Year | Intended (60/40) | Actual (drift) | Deviation |
|---|---|---|---|
| 0 | 60% / 40% | 60% / 40% | 0% |
| 1 | 60% / 40% | 67% / 33% | +7 pp equity |
| 2 | 60% / 40% | 72% / 28% | +12 pp equity |
| 3 | 60% / 40% | 75% / 25% | +15 pp equity |
At Year 3, portfolio volatility increased from 12% to 14.5% (+2.5 pp), expected return declined by 30 bps (sold bonds at top, underweighted for recovery). Endowment effect reinforced inaction—equities "felt" like the portfolio's identity, not just an allocation.
Rebalancing Triggers
- ±5% threshold — Any asset class deviating >5 pp from target triggers rebalance within 30 days. Example: 60% equity target → rebalance at 65% or 55%.
- Annual calendar — Mandatory December rebalance regardless of drift magnitude. Eliminates decision fatigue.
- Tax-loss offset — Rebalance losers first to harvest losses, offset with winner sales. Minimizes tax drag.
- Volatility governor — If portfolio vol >15% (target 12%), automatically trim highest-volatility positions by 10%.
Scenario workflow: Q4 review flags 15% equity drift. Sell 10% of equity positions (preferring tax-loss candidates), buy bonds to restore 60/40. If no tax losses available, execute in IRA to avoid cap gains. Rebalancing alpha: 40-60 bps annually from volatility reduction + opportunistic buying/selling.