If increasing returns in your portfolio were the only consideration for rebalancing, we would not bother to rebalance.  We would just let the winners run.  It is extremely difficult to rebalance for that reason.  But, here’s why we do it…………… 

1.)    Risk Management – when choosing your portfolios here at Pathfinder, there is a “risk” number associated with each strategy.  While everyone likes to see upward volatility (markets rising) we have to remind you that as markets gain in value, risk is also rising.  This alters the mix of assets you chose.  You now have additional risk in your portfolio that you probably didn’t even know about.  Therefore, we build portfolios from low correlated asset classes and rebalancing allows for prudent diversification, reducing volatility and striving to obtain market returns in each specific asset class you own.

2.)    “Buy Low/Sell High” – awesome concept right?  Well, that is being done in each of your portfolios on a regular basis.  This works in both up and down markets. When the tsunami hit Japan last March, we waited until Japan markets settled, and we rebalanced to give you the exposure you needed in the international equity portion of your portfolio.  Wow, we just bought at “low” prices, since Japan was distressed.  Conversely, when the equity markets go up, we will now sell off the portion of your portfolio that has increased in value, and re-apportion to decreased asset classes.  We just sold at “high” prices.  That is the beauty of “buying low/selling high.”    You may hear of brokers trying to “time” the market by buying low/selling high every day.  Well, this is typically not a winning strategy, however, when “rebalancing” your account periodically, proves to be very efficient for you, the investor.

3.)    While rebalancing is mainly about risk management, during many rebalancing periods, it adds an additional premium (interest) to your portfolio. For example, during one of the worst markets in history – 1/1/2007-12/31/2009, rebalancing mitigated losses by maintaining prudent portfolio weightings.  (Important:  IF you are academically diversified amongst all 19 asset classes)1

Example:             Conservative         Moderate           Growth           Aggressive

Rebalanced                7.83%                   1.76%               -6.77%              -13.21%

Non-Rebalanced      6.47%                  -1.03%              -8.94%               -14.63%

Premium                1.36%                   2.79%               2.17%                1.42%


Keep in mind that the above-mentioned premium is an annual average increase in your portfolio!

1Study done using DFA returns software. Non rebalanced portfolio shows total return of hypothetical portfolio beginning 1/1/2007 and ending 12/31/2009.  Rebalanced portfolio took the same hypothetical portfolio, and reset the asset classes back to the original allocation each quarter.  The return shown is the total return from 1/1/2007 – 12/31/2009 using this method.

Barbara A. Lane – Investment Advisor Representative, Pathfinder Wealth Management, Inc.