When it comes to investment management, many overlook the value of periodic portfolio rebalancing.

To appreciate the value of rebalancing, it helps to have a general understanding of the fundamentals. When a portfolio is rebalanced, you are returning the allocation to a defined target that was created specifically to support your unique financial goals (see my previous post  Charting a Course for Success for information about how investment management fits into financial planning). Essentially, you are selling appreciated assets and buying depreciated assets to realign your allocation with your strategic (long-term) target.

One of the consequences of not rebalancing a portfolio, is that if left unmonitored,  your allocation may deviate from your desired risk/return profile, unintentionally putting your portfolio and your financial goals in jeopardy. Consider, for example, an extended period of equity market appreciation and subsequent bond market depreciation. Depending on the magnitude of the move, a portfolio that was designed to be 60% Equity/40% Bond could shift over time to become 75% Equity/25% Bond. Leaving this allocation unattended to may result in an unobserved increase in the investor’s risk.

On the other side of the equation, periodically rebalancing a portfolio can provide the investor with substantial benefits. One can view rebalancing as a buy low and sell high strategy. As mentioned above, rebalancing a portfolio is effectively selling appreciated assets (sell high) and buying depreciated ones (buy low). Diligent monitoring of a portfolio not only maintains the portfolio’s risk/return profile, but it also reallocates assets to investments that are more likely to appreciate in the long run.

Another upside to periodically rebalancing a portfolio, are the opportunities it affords to implement tactical asset allocation adjustments, and to take advantage of tax loss harvesting. Tactical changes in a portfolio represent shorter term outlooks that aim to take advantage of the market environment without altering the long-term risk/return profile. Consider, for example, an environment of rising interest rates. Core bond exposure may not fare as well in these circumstances, but opportunistic credit assets such as high yield or bank loans may offer protection to rising interest rates. A tactical shift from core fixed income investments to credit assets may present a short term tactical opportunity. On the other hand, tax loss harvesting allows a portfolio to realize a loss today in order to offset potential future gains without changing the investment exposure. Both of these tools can be beneficial to the long term and short term health of a portfolio.

Taking the time to periodically rebalance your portfolio to maintain your target allocations not only keeps your long term goals intact, it can also provide short term tactical opportunities and tax planning benefits. While rebalancing is often overlooked, it can play a vital role in efficiently managing your wealth to support your goals.

Interested in learning more about portfolio rebalancing? Click here to reach out to our investment department with any questions you may have.

Joseph Palmieri, CFA

Director - Investments

Hall of