Home ยป What are the benefits of Portfolio Rebalancing?

What are the benefits of Portfolio Rebalancing?

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.

We manage portfolios to provide our clients with exposure that we believe will do well despite the economic environment ahead. Open your account today!

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