Portfolio Rebalancing

Portfolio Rebalancing

Simply put, rebalancing is buying or selling asset classes that fall below or rise above a predefined long-term asset class target.  Rebalancing fosters the discipline of “buy low and sell high.”  In theory, buying low and selling high seems simple, but in practice, emotions tend to dictate the actions of finance and investment committees.  Opportunities to buy (when an asset class falls below its target) are often created when bad news or negative market predictions depress prices.  Conversely, opportunities to sell (when an asset class rises above its target) may be created by good news and positive predictions of the future for that asset class.  In our experience, without adequate education, many finance and investment committees will increase investments in their best-performing asset classes and decrease their investments in their worst-performing asset classes typically at just the wrong time.  If this pattern is repeated, the portfolio value and subsequent spending availability will likely be less than desired.  A rebalancing policy should have several components, including:

1. Specific targets for each asset class.
2. A high-end and low-end tolerance band.
3. A predetermined review frequency.
4. A plan of action if an asset class is outside its band.

Our research has shown that with a disciplined rebalancing policy, you may be able to improve your performance and lower your volatility.

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