Rebalancing a Portfolio

Susan Jung |


Rebalancing a portfolio is a strategy that has proven the test of time and is an important part of maintaining a portfolio that is balanced between risk and reward. However, when markets are rising and a position moves higher, some question the wisdom of this strategy.
The questions usually asked include the following:

  • Why would we sell any of a position that is rising? 
  • Shouldn't we be selling positions that aren't rising?
  • Shouldn't I just have a few eggs in my investment basket?

Today's audio update talks about rebalancing and why we believe it makes sense from a portfolio management standpoint. Click here to listen. 
Stock Picking vs Portfolio Rebalancing
There is a significant difference between simply buying individual stocks or positions that one thinks will go higher and constructing a prudent portfolio management strategy. Remember, DWM portfolio strategy is about moving your portfolio forward towards your long-term goals in a way that balances return versus risk. 
An article from the research company Morningstar summarizes for new investors the reason why rebalancing makes sense. While this article is from a number of years ago, it's points still resonate and are valid. In that article they state:
Begin quote
The primary function of rebalancing is to control risk. The varying performance of asset classes over time causes a portfolio to shift away from its target asset allocation. For example, riskier assets exhibit more volatility, but also tend to outperform safer investments. Over time, as their proportional share grows, the risk of the portfolio drifts away from the target. Rebalancing controls this risk by moving capital between investments to re-establish the target asset allocation.
End quote
Source: April 3, 2013 by Abby Woodham  
Rebalancing Goal
The bottom-line goal for rebalancing is moving portfolios towards a target allocation that remains fairly consistent over time. Makes complete sense. 

It's somewhat puzzling to some in the investment business why an investor would be concerned about carving profit off of a position that has done particularly well. I think the reason is quite simple and is rooted in human nature. Most investors love what has gone up in their portfolio and dislike what has gone down. 
In my many years of investing, I've seen many names that investors have loved that have lost 20% or 40% or 60% or 80% of their value and have impacted long-term financial plans. During the dot-com bubble I can remember some tech names that hit incredible highs. I recall some saying that they wanted to have 70% or 80% of their money in technology names. I remember some so-called diversified mutual funds that were 75% technology names. As you recall, the dot-com bubble didn't end well for speculative investors.

Risk matters. 
A Core Philosophy
As a portfolio manager focused on moving assets in a direction to help meet long-term goals, we believe in rebalancing portfolios. You often will see us sell small parts of assets that have gone up in value and buy small amounts of assets that have lagged or dropped in value. We believe this rebalancing is important and a core part of our strategy as we do our best to reduce risk while seeking return. 

I know this topic can be somewhat confusing and counterintuitive. Doesn’t seem to make sense unless you look at it from an overall portfolio management standpoint. The rewards of rebalancing are clear from our perspective.
If you're looking for additional articles on the subject, you can click on these links. They may provide some additional insight.
For Educational Purposes Only:   


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