Broker Check

Rebalancing is Tough, But Worth It

| October 28, 2019

In our last post, we explained what rebalancing is, why it’s a good thing for investment portfolios, and the importance of having a plan.

Now we’re going to dive deeper into why rebalancing works and how often you should it.

All About Averages

Over time, rebalancing can improve your returns and lower your risk. How much? That depends on the mix of stocks and bonds in your portfolio. The economic sectors in which you invest also matter.

Studies shows that rebalancing even once per year can deliver better performance with less volatility than a portfolio that remains unchanged.

Why is that? Rebalancing works for a couple of reasons.

First, history has shown that, in general, a fund or category of funds that excelled one year will not do as well the following year. History has also shown the reverse to be true.  Funds with poor performance one year will often perform better the next year. 

This concept is called “regression to the mean.”  In other words, things average out. It holds true in sports, investing, and everything else.

The second reason rebalancing works is it forces you to understand your investments and adjust them to fit an overall vision. Many people use a professional advisor for this. An advisor can help you create and manage a financial plan.

It’s important to understand that rebalancing doesn’t mean you constantly tinker with your portfolio. Rather, you’re engaged in the portfolio enough to make sure you’re on track to where you want to go.

Feels like Losing

Most investors know they should rebalance. But when it comes time to make the changes, they hesitate. 

It’s because of emotion. To rebalance, you sell funds that did the best and invest that money into funds that aren’t doing as well.  How can you sell a winning asset to buy one that’s losing?

Which brings us back to square one – we know we should rebalance, but we don’t.  And the reason is because rebalancing feels like losing. And we don’t like losing.

But over time, rebalancing is most often a winning strategy.

Plan, Adjust, Act, Repeat

Instead of viewing rebalancing as a losing proposition, think of it as planting a future seed. Done regularly over time, rebalancing reaps the rewards of good performance to take advantage of opportunities.

Just like with seedlings, timing matters when it comes to rebalancing. How often to rebalance depends on personal circumstances.

There are a few common approaches people use. Some suggest rebalancing on a periodic basis (e.g., every year, quarter, etc.). Others use a threshold basis, meaning you adjust asset classes as they fall too far out of desired allocations. You can also rebalance based on volatility and other technical indicators.

We suggest rebalancing once per year at a minimum, preferably twice. It’s as easy as setting recurring calendar appointments. And, if you have a plan in place, stick to it.

The important part of rebalancing is actually doing it. While uncomfortable, you benefit when you harvest today to feed tomorrow’s growth.

Over time, you’ll be glad you did.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.