Periodic rebalancing is the action of buying and selling investments in a portfolio to adjust their weighting back to the long-term asset allocation targets.
Unfortunately, many investors allow their portfolios to drift too far from target as markets rise and fall. Therefore, retail investors tend to have their highest allocation to equities before a market crash and have the lowest equity allocation as markets begin to recover after a sharp decline. As David Swenson, CIO of the Yale Endowment for many years, discussed in his book “A Fundamental Approach to Personal Investment”, periodic rebalancing delivers tremendous benefits to portfolios.
The First major benefit is that a periodic rebalance helps ensure that a portfolio stays in line with intended asset allocation targets and portfolio risk levels. In other words, it prevents having too much of your portfolio tied to the performance of equities when you do not intend to or having too much of your portfolio tied to the performance of bonds when a heavier weighting to risk assets would be more appropriate.
The Second major benefit is that periodic rebalancing can enhance returns by forcing investors to systematically buy low and sell high. This is difficult for investors without a systemic rebalancing process in place because it does require overcoming the behavioral challenge associated with selling what has done well and instead buying the laggards.
Third, it adds a convenient cash management solution that naturally helps manage cash flows into and out of the account. For example, as cash gets added to the portfolio, the rebalancing mechanism may trigger the deployment of cash into the most underweighted investments while keeping the portfolio aligned with target allocations and risk levels.
With these benefits of periodic rebalancing so clear, we find it unfortunate when investors simply forget to rebalance or do so in a way that creates costly tax liabilities unnecessarily. At Metas Investments, we make sure these things do not occur by performing rebalances anytime positions get too big or whenever we make adjustments to our portfolio models.
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Metas Investments LLC (“Metas”) is an investment adviser registered with the State of Texas and our fees and services are more particularly described in Form ADV Part 2A.
This presentation provides general information about the business practices and professionals of Metas. The information is not intended, and should not be construed, as legal, tax or investment advice. The information provided has not been approved or verified by any state or federal securities authority. Additional information about Metas is available on the Securities and Exchange Commission website at www.adviserinfo.sec.gov.
This presentation is for informational purposes only and does not constitute an offer to provide advisory or other services by Metas in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. The information contained on this presentation should not be construed as financial or investment advice on any subject matter and statements contained herein are the opinions of Metas and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. Viewers of this presentation should not assume that all recommendations will be profitable or that future investment and/or portfolio performance will be profitable or favorable. Metas expressly disclaims all liability in respect to actions taken based on any or all of the information on this presentation. Past performance does not guarantee future results. All investing involves risk. Investment return and principal value will fluctuate with changes in market conditions. Current performance of positions may be higher or lower than presented in this report. Nothing in this report should be construed as an offer, recommendation, or solicitation to buy or sell any security. Additionally, Metas Investments does not provide tax advice and investors are encouraged to consult with their personal tax advisors.
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