Fear of rebalancing? Put a disciplined policy in place

Wellington
By May 22, 2020 11:53

Fear of rebalancing? Put a disciplined policy in place

The primary goal of rebalancing is to minimize risk relative to strategic asset allocation targets, which are deliberately set to match an organization’s return, risk, and liability or spending profile. In short, rebalancing avoids overexposure to outperforming asset classes and underexposure to underperforming asset classes, all in the interest of maintaining a pre-defined risk posture. While that all sounds very reasonable, the reality is that rebalancing can be an emotional decision, particularly in extreme market environments when our instincts may tell us to run from asset classes that are selling off in dramatic fashion. We believe a well-structured rebalancing policy that sets rules for when and how a portfolio is reallocated can help take emotion out of the process. In addition, while past performance is no guarantee, we have seen evidence that investors who have followed disciplined rebalancing policies have been rewarded over the long term for having “bought low” as the market went through a bottoming process rather than trying to time the precise market trough. And, of course, opting not to rebalance is an active decision with risks of its own, including less diversification and more volatility than intended.

Wellington
By May 22, 2020 11:53

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