Rebalancing: Have a Plan in Good Times and Bad

scales balance

A balanced portfolio is always a good idea–and now, more than ever

Keeping a portfolio balanced in accordance with your long-term investment plan is never a bad idea, but as we sit at nominal market highs and approach a changing of the guard in Washington, continued political uncertainty abroad, and other risks, we believe it makes all the more sense.

When markets are making new highs, as they have been recently, it is easy for investors to focus on the return side of the equation and disregard the equally important element of risk.  A well-crafted investment strategy will have considered the appropriate level of risk for your individual circumstances, but the plan is only useful if it is followed diligently.  As markets rise and fall, the risk level within your portfolio adjusts constantly.  If left unattended, the riskiness of your portfolio could drift significantly from what is appropriate.

How often should you rebalance?

Rebalancing activity must itself strike a balance—between being too often or meticulous and being too laissez-faire to provide adequate risk control.  The goal of maintaining the appropriate level of risk would argue for near-continuous rebalancing of a portfolio, however this would increase transaction costs and potentially taxes, both of which reduce your investment return.  On the other hand, checking in only occasionally may cause you to miss sudden and significant developments in markets.

With those competing factors in mind, some recommend setting regular calendar intervals—such as quarterly or annually—to check in and rebalance.  We believe this approach falls short in addressing the competing factors of maintaining the desired level of risk while minimizing trading costs and taxes, and propose setting corridors or ranges around your long-term portfolio targets.  For instance, if you have allocated 60% to equity in your portfolio, letting the portfolio drift between a certain range—perhaps plus or minus 5%—before acting.  In practice there is not a substantial difference in risk between a portfolio with 60% or 62% equity, so this approach reduces the frequency (and thereby costs) of rebalancing.  It does provide an objective trigger, however, to act when meaningful shifts arise in your portfolio.

Discipline: an added benefit of rebalancing.

We have all heard the sage investment advice of buying low and selling high.  As basic and logical as that may sound, much of the research in the field of behavioral finance suggests that investors, as normal human beings, experience a range of emotions and biases that make it difficult to adhere to that most fundamental rule.  Having a plan to rebalance ahead of time (and sticking to it) helps investors capitalize on that rule.  By definition, the act of rebalancing a portfolio involves selling some of the assets that have done relatively well (selling high) and buying some of the assets that have done relatively poorly (buying low).  Importantly, we believe this practice is just as important in strong markets and weak markets.  There are equal hazards in the euphoria of market highs as there is in the despair of market corrections.


Successful investing is not a set-it-and-forget-it proposition.  Markets evolve and risks surface and subside, and your long-term investment plan should take this into account.  That plan, however, is only useful to the extent that you adhere to its guidance, and that should include having a plan of when and how to rebalance your portfolio.

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