Rebalancing keeps a diversified portfolio aligned with its targets by trimming out performers and adding to under performers. Focus Partners’ Chief Investment Officer of Systematic Strategies Kevin Grogan shares how this strategy can help mitigate risk, maintain discipline, and help investors stay focused on long-term goals, rather than short-term market swings.
When markets move sharply, whether up or down, investors often feel the urge to act. But sometimes the most important action is the one that you’ve planned in advance.
Rebalancing Can Help Bring Your Portfolio Back Closer to Its Targets
When you own a diversified portfolio, your goal is to own a variety of different asset classes that will perform differently from one another in different market environments.
Over time, the winners will become a larger portion of your portfolio. When that happens, the risk level of your portfolio can quietly rise over time as the portfolio becomes more concentrated in those asset classes that have performed well. Rebalancing trims what has outperformed and adds to the areas that have underperformed. It’s essentially a disciplined way of selling high and buying low.
This Can Be Difficult to Do in Practice From a Behavioral Perspective
When something has been performing well, trimming it can feel uncomfortable. When something has struggled, adding to it can feel counterintuitive.
Markets move in cycles, and the portion of your portfolio that’s outperforming today could be underperforming tomorrow. Rebalancing is somewhat analogous to exercise—after you’ve had a very difficult workout, oftentimes the next morning can feel sore and uncomfortable. But that discomfort is a sign that you’re disciplined and your exercise plan is working.
That discomfort you feel from selling the thing that has performed really well recently, and adding to the thing that has performed poorly recently, is a sign that you’re disciplined; your long-term plan is working.
Conclusion
Rebalancing is not primarily about boosting your overall returns, but it’s about controlling the risk level of your portfolio and preventing your portfolio from becoming overly concentrated in one or two different asset classes. It helps your portfolio stay aligned with its long-term objectives. And in volatile markets, discipline matters. Rebalancing isn’t about reacting to the moment, it’s about staying aligned with your long-term plan.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have ap- proved, determined the accuracy, or confirmed the adequacy of this article.
