Evans Wealth Management Blog

Articles written by Evans Wealth Management are designed to educate clients & potential clients on concepts important to their financial future.

When to 'Rebalance' Your Portfolio

Rebalancing is the process of realigning (buying or selling) your assets in order to keep the allocation levels about the same. Each allocation level is “weighted,” which further aids the concept of balance.

 

Many investors are at least familiar with the concept of rebalancing. However, few could articulate the value of the process and even fewer implement it on a regular schedule. The basic concept is to execute that time-tested adage of investing: sell high and buy low. This way, you take the gains from high-performing investments and reinvest them in areas that have not yet experienced such growth. The following brings insight to this strategy and illustrates the benefits of its execution.

 

The period being studied: Jan. 1, 1970 to Dec, 31 2015.

The portfolios contains 7 asset classes: large-cap US stocks, small-cap US stocks, non-US developed stocks, real estate, commodities, US bonds and cash.

Each asset class is equally weighted (14.29%).

2 portfolios: one was never rebalanced, rebalanced annually at the end of the year.

$7K was invested in each portfolio at the beginning of every year

Taxes were not considered.

 

Did rebalancing produce a performance advantage? See chart for details. 

What was learned?

 

A rebalancing advantage was calculated in 78% of the 27 rolling 20-year periods. The average advantage was $13,722. Two of the 6 periods where rebalancing produced a disadvantage were periods that ended at the high point of the tech bubble. When an asset class is on a roll year after year, no rebalancing will produce the best result – for a time. Eventually, the portfolio allocation to that asset class becomes such a large % of the account, so that when the bubble bursts, the account is hit extremely hard. Since no one is clairvoyant, your best odds for successful portfolio management are to rebalance at least once a year.

 

Thanks to Craig Israelson for the research.

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