Looking for Balance

How often should you rebalance a portfolio?

People often ask this question. They’ve got a balanced allocation, or one slightly skewed towards stocks or bonds, and they want to know how often they should adjust back to that target. Many advisors recommend annual or quarterly rebalancing.

Rebalancing a portfolio is generally a good move. It forces you to sell assets that have done fairly well and buy those that have underperformed. But sectors, like companies, do poorly for a reason. When Business Week published their famous cover story on the death of equities in 1979 the stock market had been in a 17-year funk. Double-digit inflation, energy shortages, productivity problems, and other issues were rampant. There were serious concerns about the long-term health of the US economy. Business Week didn’t publish the story to look foolish; they were describing the current conditions.

But we know how that story ended. Stocks began a phenomenal 20-year bull market shortly thereafter. Investors who had rebalanced their portfolios did well. But if you had rebalanced too early you had to suffer through some dismal returns to get to the good times.

Rebalancing typically means catching a falling knife, and it can be painful. If you rebalanced in 2000 and 2007, you feel like a genius. But if you sold bonds at the end of 2010 because yields just couldn’t go lower, 2011 didn’t feel so good. Rebalancing works, but it can take a while to work. As with many investing tools, patience is the investor’s best performing asset.

Douglas R. Tengdin, CFA
Chief Investment Officer
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