The concept of rebalancing an investment portfolio can be traced back to the original theory of the Efficient Frontier which was introduced by Nobel Laureate Harry Markowitz in 1952 and became the foundation of what is known today as modern portfolio theory. Chances are, your investment portfolio was constructed on this principal and whether your equity-to-bond mix is 80/20, 60/40, 50/50 or something different, the objective was to create a balanced portfolio that would seek to meet your goals and tolerance for risk.Rebalancing is the act of resetting your portfolio to its original allocations and it is widely accepted as an important part of portfolio management. Rebalancing requires selling holdings in your portfolio that outperformed others and purchasing more of the assets that underperformed. That may seem odd, since intuitively, you would think you would not want to sell the investments that were doing well. But again, rebalancing is about bringing your portfolio back to the asset allocations you began with so that you are not exposed to either undue risk or improperly positioned to participate in market upside. Questions often arise, however, around the frequency of reallocating and the types of market environments in which reallocation should occur.

Frequency

The frequency of rebalancing varies by investor and can be scheduled to occur on a regular basis, such as every six months or annually, or can occur more strategically, like when the market moves more than 10%. In periods of high market volatility, the original portfolio allocations can change very quickly and may warrant a more proactive approach to reallocating. For example, heading into this year, a 60/40 stock and bond portfolio quickly got out of whack when the stock market lost 30% of its value due to the impact of the COVID-19 pandemic. Many advisors recommend resetting portfolios after such an extreme event, rather than waiting for a calendar scheduled date.

Markets

Many believe stocks had a great year in 2019. The S&P^® 500 Index was up over 31%. With equities on such a strong run, investors could not be criticized too harshly if they wanted to wait on reallocating their portfolio for fear of missing out on more upside. But therein lies the problem. Portfolios that had become over weighted to stocks (due to outperformance) were poorly positioned to withstand the drawdown risk when the markets turned. And boy, did they turn. So, opinions vary around the importance of rebalancing during bull and bear markets.

First, it is worth noting that rebalancing helps take the guesswork out of trying to know when markets will hit new highs or lows. Trying to time the market is a fool’s errand and rebalancing helps investors position their portfolios to help weather down markets and participate in up markets.

So, what about the current market and all its volatility? Is this a time to rebalance when equity markets are swinging in value 4-5% every day? While a rebalanced portfolio can help you maintain your desired allocations during very volatile markets, it simply may not be practical to rebalance often enough when markets are moving up and down so much and so frequently.

If you have not reviewed your investment portfolio in a while, now is a very good time to do that. Your appetite for risk may have changed (justifiably!) since you originally set your asset allocations, and certainly your portfolio weightings have changed. 

At Bangerter Financial Services, we pride ourselves on the degree of attention we pay to monitoring and managing every client’s unique investment portfolio, and that includes the important aspect of rebalancing. Weathering tough markets often comes down to having a solid plan to stick to, which is a cornerstone of our practice at Bangerter. But frequent, consistent communication is equally important to helping our clients stay on track to achieve their long-term investment goals. 

Please reach out to us if you think it might be time to revisit your own portfolio allocations. We’d be honored to assist you.