Rebalancing of any sort in investing presumes an underlying stability to the economic system, and thus, market returns. Rebalancing will not protect against socialism, war, or an overleveraged position.
The concept of rebalancing requires the idea of reversion to mean. It will not protect you when profound shifts are happening, where the market are moving to a new equilibrium different from the old one.
Many shifts in the markets are precipitous; they don’t allow for slow adjustment. That’s why many lose out when sharp shifts occur. Especially in leveraged positions, the question comes: “Do I take my loss, invest more, or just let it ride?”
The best answer is forward-looking, only asking what is most likely. The best preparation is also forward-looking, but with a glance to the past, asking what could happen at worst, which is worse than the worst of the past.
There are times when it seems that stability is no more, or that the boundaries for stability are far larger than normal, such as now. At such a time, it may pay to follow market trends, realizing that there many participants like you that are struggling to figure out the situation that everyone is in.
The point is to be forward-looking. Ignore the past. Ask what is most promising over your favored time-horizon.
So when it makes sense, add to a position that has lost money. When it doesn’t make sense, sell the whole position and realize the loss. Could this be simpler?