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4 Benefits of Portfolio Rebalancing


Update 3/25/2020 – With the carnage in the markets over the past month, as painful as it might be its important to look at your portfolio’s asset allocation. What has the drop in the stock market done to your asset allocation? Rebalancing back to your target allocation is a good start. This might also be a time to review your target allocation to see if it still fits your situation, including your appetite for risk. During the coming weeks, as we hopefully see the markets stabilize and even start to recover a bit, you will want to revisit your portfolio and check the allocation a bit more frequently than you might normally to ensure that your portfolio is properly allocated. 

Update 2/25/2020 – With yesterday’s drastic decline and increased volatility in the major averages I think rebalancing becomes even more relevant and important for investors. 

Update 2/6/2020 – Since my last update of this post the three major stock market averages, the S&P 500, the Dow and the NASDAQ all closed at record highs today. For many of you, your portfolios are likely up based not only on the stellar performance of stocks in 2019, but also due to the bull market that could soon hit its eleventh anniversary in the next few months. If you have not been in the habit of rebalancing your portfolio at regular intervals, this is a tactic you should be consider adopting. 

Last year was a down year for the markets, with the S&P 500 down 4.38% in 2018, the first down year for the benchmark since 2008. The index is up again in 2019 with a gain of 29.25% YTD through December 27.

So far, 2019 has been a solid year for real estate and a good one for fixed income as well. With all of these gyrations among various asset classes, you may be taking on more or less risk than is appropriate for your situation. If you haven’t done so recently, this is a good time to consider rebalancing your investments. Here are four benefits of portfolio rebalancing.

4 Benefits of Portfolio Rebalancing

Balancing risk and reward

Asset allocation is about balancing risk and reward. Invariably some asset classes will perform better than others. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.

During robust periods in the stock market equities will outperform asset classes such as fixed income. Perhaps your target allocation was 65% stocks and 35% bonds and cash. A stock market rally might leave your portfolio at 75% stocks and 25% fixed income and cash. This is great if the market continues to rise but you would likely see a more pronounced decline in your portfolio should the market experience a sharp correction.

Portfolio rebalancing enforces a level of discipline

Rebalancing imposes a level of discipline in terms of selling a portion of your winners and putting that money back into asset classes that have underperformed.

This may seem counter intuitive but market leadership rotates over time. During the first decade of this century emerging markets equities were often among the top performing asset classes. Fast forward to today and they coming off of several years of losses.

Rebalancing can help save investors from their own worst instincts. It is often tempting to let top performing holdings and asset classes run when the markets seem to keep going up. Investors heavy in large caps, especially those with heavy tech holdings, found out the risk of this approach when the Dot Com bubble burst in early 2000.

Ideally investors should have a written investment policy that outlines their target asset allocation with upper and lower percentage ranges. Violating these ranges should trigger a review for potential portfolio rebalancing.

A good reason to review your portfolio

When considering portfolio rebalancing investors should also incorporate a full review of their portfolio that includes a review of their individual holdings and the continued validity of their investment strategy. Some questions you should ask yourself:

  • Have individual stock holdings hit my growth target for that stock?
  • How do my mutual funds and ETFs stack up compared to their peers?
    • Relative performance?
    • Expense ratios?
    • Style consistency?
  • Have my mutual funds or ETFs experienced significant inflows or outflows of dollars?
  • Have there been any recent changes in the key personnel managing the fund?

These are some of the factors that financial advisors consider as they review client portfolios.

This type of review should be done at least annually and I generally suggest that investors review their allocation no more often than quarterly.

Helps you stay on track with your financial plan 

Investing success is not a goal unto itself but rather a tool to help ensure that you meet your financial goals and objectives. Regular readers of The Chicago Financial Planner know that I am a big proponent of having a financial plan in place.

A properly constructed financial plan will contain a target asset allocation and an investment strategy tied to your goals, your timeframe for the money and your risk tolerance. Periodic portfolio rebalancing is vital to maintaining an appropriate asset allocation that is in line with your financial plan.

The Bottom Line 

Regular portfolio rebalancing helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. It also can help investors impose an important level of discipline on themselves.

How has the volatility in the stock market impacted your investments and your financial plan? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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  1. Having a predefined rebalancing schedule has taken away much of the emotional stress of when (and what) to buy and sell, and turned market corrections into opportunities to buy stocks on sale (when I next rebalance).

    Great post.

    • Roger Wohlner says

      John thanks for the comment and the compliment. Rebalancing adds a level of discipline to the investing process.

  2. Hey Roger,
    I followed you over from you sharing this post in the FinCon FB group. Nice article!

    I always thought of rebalancing similar to your first point, but more specifically as a dollar cost averaging technique. If you want to maintain a certain percentage target distribution in your portfolio that will mean having to sell off some funds (that may be doing well) and buying others that aren’t.

    Thanks for the article and see you around the FinCon group.

  3. One thing I learned from the book, Freakonomics , was that conventional wisdom is almost always wrong. Michael Kitces blows up the conventional wisdom of portfolio rebalancing with his theory that annual
    rebalancing results in worse returns than a buy-and-hold approach. While it does marginally improve risk-adjusted returns, “people don’t eat risk-adjusted returns,” Kitces points out.

  4. I love rebalancing. It lets me make sure that my risk appetite is the same as what I intended / wanted it to be. Great post!

  5. Great article, as always. I really like your point about discipline. This is becoming most crucial as we see increased volatility. This is why financial advice is always better served from a trusted advisor and not a robot.

    • Roger Wohlner says

      Thanks for the comment Nick. I agree that a trusted advisor is a great partner in the financial planning process. However, I have become more and more impressed with some of the robo platforms that I have seen and I think this technology can be useful in working with some clients and for some of those doing it themselves.

  6. I think that the most important idea to take from the article is that one needs to have a properly constructed financial plan in order to succeed in his investments for the long run. That way you can know if you are on the trek from year to year, and you do not spend precious time of your life without going forward towards your financial goals.


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