My F&M

Rebalancing

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The problem with the adage “Buy Low, Sell High” is that we do not know if something priced low will fall further or something that is high will continue to rise. Since we have no clear indication of short term market changes, we do not attempt to profit from market timing. However investors can benefit from volatility while providing quality risk controls by consistently rebalancing client portfolios.

Rebalancing is a process where we return a portfolio to the asset allocation dictated by the client’s investment policy statement. We will sell what has performed well relative to the rest of the portfolio (and now makes up too large a portion of the total) to buy what has not performed as well. This returns the portfolio to the asset allocation and risk profile that the client dictated and builds in a disciplined “Buy Low, Sell High” approach that does not involve market timing.

A simple example of rebalancing with just two investments is displayed in the table below. Rebalancing does not benefit us every year. When the stock market consistently goes up or down for long periods of time rebalancing will actually hurt returns (years 2 and 5). When the market is most volatile it provides added return and risk control (years 3 and 4). The table provides an extreme example that adds .6% to the average annual return. Over a market cycle we expect that regular rebalancing will add around .25% annually while also providing risk control benefits.

Two Asset Example of Benefit from Disciplined Rebalancing