Looking for Balance (Part 2)

How often should you rebalance a portfolio?

Rebalancing a portfolio is a good idea, and it takes some time for things to work out. But when should you do it? We know rebalancing is important. It forces us to trim our winning positions and buy segments of the market that haven’t done so well. Buying low and selling high is a good way to add value.

But timing is important. If you rebalance too often, you’re just adding trading costs, not value. But if you wait too long, you miss the opportunities to capitalize on market turns that rebalancing captures.

Many people look at rebalancing annually, around year-end, or quarterly, or even monthly. But that doesn’t make sense. There’s nothing magic about December 31st or January 1st. They’re days like any other, and the analytic software that recommends rebalancing around year-end does so because we have year-end performance numbers to calibrate our models.

It makes much more sense to use the actual performance of the markets to determine when to buy and sell. Your targets should be set strategically, based on what kind of investor you are. But rebalancing is a tactical operation, based on market conditions. Our research shows that when the market has moved your target 5-10% away from your strategic objective is usually a good time to adjust. This allows a trend time to develop, but allows you to benefit from the trend’s reversal.

Markets move on their own schedule. By waiting until your portfolio shows that it needs to be adjusted you avoid excessive activity. Once again, patience is the intelligent investor’s best asset.

Douglas R. Tengdin, CFA
Chief Investment Officer
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