Disciplined Rebalancing

What is portfolio rebalancing?

Rebalancing is a critical component of your Personal Strategy, helping your investments remain aligned with your financial goals. As a service to our Personal Wealth clients, intelligent rebalancing uses software to review and rebalance your portfolio to keep you on track for your long-term goals, eliminate costly emotional mistakes and potentially enhance your risk-adjusted returns.

Benefits of rebalancing

The primary benefit of portfolio rebalancing is risk management. When someone builds an investment portfolio, they usually create an asset allocation of both low-risk and higher-risk assets as a way to mitigate risk while still achieving healthy returns. While a portfolio of only equities might result in higher returns during many years, it also creates more risk of your portfolio losing value.

Over time, your asset allocation will change as your investments perform differently. During a bull market, the share of your portfolio devoted to equities is likely to grow, while the share of fixed-income securities like bonds will shrink. As a result, the amount of risk in your portfolio also grows. Rebalancing gets your portfolio back to your target asset allocation to help ensure you aren’t taking on more risk than you wanted to. Rebalancing does not ensure a profit or protect against loss.

How does portfolio rebalancing work?

When you build your investment portfolio, you’ll likely decide on a specific asset allocation that’s appropriate for your financial goals, risk tolerance and time horizon. But as time passes, certain investments will have higher returns than others, and therefore will begin to take up a more significant percentage of your portfolio.

For example, you may decide on an asset allocation of 60% stocks and 40% bonds. But in a bull market, your stock investments are likely to perform far better than your bond investments. The next time you check in on your portfolio, you might find that stocks now make up 70% of your portfolio, while bonds only make up 30%.

That’s where portfolio rebalancing comes in.

Portfolio rebalancing is the process of changing your asset allocation to get back to your target portfolio. There are a couple different ways you can realign your asset allocation for your financial goals:

Sell high-performing assets to buy more of the low-performing securities. For example, if your target asset allocation was 60% stocks and 40% bonds, but your portfolio had strayed to 70% stocks and 30% bonds, then you might sell 10% of your stocks to buy bonds. This strategy is the most common approach to rebalancing.
Allocate new money to lower-performing securities. This strategy doesn’t require you to sell any of your existing securities. Instead, you allocate new money to the lower-performing securities until you’ve arrived at your target asset allocation.

Rebalancing might seem counterintuitive. After all, you’re selling securities that are performing well, only to buy others with lower returns. But that’s the ultimate goal of investing — buying low and selling high.

Should you rebalance?

Yes

In general, anyone with multiple assets in their portfolio should consider rebalancing at least occasionally. Rebalancing can help mitigate risk and help ensure that one asset class, sector or individual security doesn’t take up too large a percentage of your portfolio.

No

One situation in which rebalancing may not be necessary for your portfolio is if you only invest in a single asset. While this is rare, it may be the case for someone investing in a target date fund. This type of pooled investment is designed to adjust its asset allocation over time so investors don’t have to do it themselves. Rebalancing may also not be necessary if you use a robo-advisor to manage your investments automatically.

How often should you rebalance your portfolio?

An important question you may ask about rebalancing is how often you should do it. If you’re an Personal Asset Personal Wealth client, we take care of the rebalancing so you don’t have to worry about it, but if you manage your own portfolio, it’s important to consider your own timeline.

There are generally two ways to approach the frequency with which you rebalance your portfolio. First, you might rebalance based on a set calendar schedule, such as once every quarter, every six months or every year. This approach is easier to plan for since you can simply set up a recurring task on your calendar. The downside, however, is that you may end up rebalancing your portfolio when it doesn’t really need it.

The other approach is to rebalance based on your asset allocation. Using this approach, you would typically rebalance your portfolio each time your asset allocation has strayed from your target by a certain percentage. The benefit of this approach is that you’re only rebalancing when your portfolio really needs it.

Remember that while failing to rebalance your portfolio may have some downsides, so does rebalancing too often. It often can result in costly transaction fees and capital gains taxes, cutting into your returns.

Fortunately, rebalancing is one of the core services included in our Personal Strategy that we provide our wealth management clients, so you don’t have to worry about it.

An intelligent approach to portfolio rebalancing

For Personal Asset Personal Wealth clients, we take an intelligent approach to rebalancing that can help keep your portfolio on track with your long-term goals, eliminate costly emotional mistakes and potentially enhance risk-adjusted returns by creating a systematic way to buy low and sell high.

Our intelligent approach includes software that reviews our clients’ portfolios each day for rebalancing opportunities, with the goal of keeping turnover below 15% in most years.

Advantages of your Personal Strategy

Tax optimization

Our sophisticated tax-optimization process focuses on three key areas: asset location, tax-loss harvesting and tax efficiency.

Disciplined rebalancing

We review portfolios daily for rebalancing opportunities. This provides the potential for enhanced returns by creating a systematic way of buying low and selling high.

Smart Weighting™

Smart Weighting provides more even exposure to factors such as size, style, and sector, ultimately providing better diversification for your portfolio.

Dedicated advisor

Your own dedicated advisor will be there along the way to help with financial planning needs and behavioral coaching.

Advisory services are provided for a fee by either Personal Capital Advisors Corporation ("PCAC") or Personal Asset Advisory Group, LLC (“EAG”) depending on your specific investment advisory services agreement. Both PCAC and EAG are registered investment advisers with the Securities and Exchange Commission (“SEC”) and subsidiaries of Personal Asset Annuity Insurance Company of America. Registration does not imply a certain level of skill or training. Investing involves risk. Past performance is not indicative of future returns. You may lose money. All visuals are illustrative only. Actors are not PCAC or EAG clients.

Intelligent portfolio rebalancing