Michaela C. from Lexington, KY asks: Hello Mitch, my
question is in regards to portfolio rebalancing. How often do you recommend
investors rebalance, if at all, and what is the best way to approach it?
Mitch’s Response:
Thanks for writing, Michaela. Portfolio rebalancing is a
very important feature of smart investment management, in my view, and I think
it is a key undertaking for most investors. It’s great that you’re giving this
topic some thought.
For readers who may not be familiar with the term rebalancing,
it generally refers to the process of keeping an investment portfolio aligned
with the desired asset allocation. For example, if the optimal asset allocation
for your long-term objectives is 60% stocks and 40% bonds, rebalancing would
mean keeping those percentages roughly intact. If in a given year stocks soar
and bonds lag, your investment portfolio may wind up say 68% in stocks and 32%
in bonds. Rebalancing would have you trim your stock holdings and buy bonds to
get back to 60/40.1
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For example, a person who five years ago invested in a
portfolio of 60% global stocks and 40% bonds – but never rebalanced – would
today have about 72% in stocks and 28% in bonds. For a retiree, that could mean
having more equity exposure than is appropriate given risk tolerance, cash flow
needs, etc.
According to Vanguard, only about half of investors
regularly rebalance their portfolios – a figure I think should be closer to
100%. Not only does rebalancing keep a portfolio aligned with a recommended
asset allocation, but rebalancing also helps an investor buy low and sell high,
as one is generally re-allocating capital from an outperforming stock or asset
class to an underperforming or neutral one.
As far as the approach is concerned, I believe investors
should revisit their asset allocations at least once a year, to ensure your
investment portfolio/strategy is aligned with your goals, cash flow needs, risk
tolerance, and time horizon. Once you determine the appropriate asset
allocation, you can set about rebalancing and managing a portfolio to keep your
equity and bond exposure in line.
Various studies have shown that there is not a significant
difference in return for an investor who rebalances monthly versus quarterly or
annually, so I tend to favor the time horizon of once per year – unless your
goals change. At Zacks Investment Management, we actively manage portfolios to
ensure our clients’ recommended asset allocations align with their investment
portfolio allocations, and we regularly have discussions to make sure our
recommended asset allocation is appropriate given a clients’ goals and
objectives. In other words, working with us means not having to worry about
whether you are rebalancing correctly or often enough.
In addition to managing a diversified portfolio that meets
your investment goals, we recommend that investors, especially those who are
nearing retirement, start planning a retirement strategy that takes the “what ifs”
into account. The future of the market is uncertain, but never give in to the fear
of what’s to come. It’s better to prepare for it! Our free guide can help you
to prepare as you strive for long-term success.
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Solid Is Your Retirement Strategy.3 You’ll get valuable and
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Disclosure
1 Wall Street Journal. June 4, 2021. https://www.wsj.com/articles/portfolio-rebalancing-is-a-good-retirement-habit-11622815200
2 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
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