Investment Portfolio Rebalancing

  • Besides asset allocation, portfolio rebalancing has more impact on total return than any other aspect of investment policy.
  • All investment portfolios should have an investment policy that includes asset allocation target percentages and allowable ranges around those targets.
  • Bull Markets in equities are relatively steady, long lasting, and hence create an “upwardly biased” long term pattern.
  • Bear Markets are sudden and sharp, but comparatively brief.
  • Equity markets exhibit a “Central Tendency” that may be unpredictable in the short run, but ‘revert’ to their mean of a 10 – 12% return per year over time.
  • All rebalancing methods involve marginal selling of out-performing assets and re-deploying into under-performing investments.
  • Age-old questions: When do we rebalance and by how much?

Why Dynamic Rebalancing?

  • By rebalancing based on the ‘calendar’ (every month, quarter or year etc.), investors may not be able to take advantage of long running bull markets or rapidly rebounding bear markets.
  • By rebalancing when an investment is ‘out of balance’ by a fixed %, investors may lose their chance to capture profits or take advantage of extraordinary investment opportunities.
  • Dynamic Rebalancing uses markets cycles monthly to tell us:
    • When to Rebalance: use the momentum of the markets to capture larger returns as the market moves between bull and bear phases
    • How much to Rebalance: use the strength of market moves to enhance the probability of achieving greater returns by allowing over and under weighting in addition to rebalancing “to target”.
  • Dynamic Rebalancing reviews asset class-specific trends each month and only takes action on “outlier” signals which reduces turnover. In most months there are no trades made.

Dynamic Rebalancing in Action

Technology Bubble

Credit Crisis

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Past performance provides no assurance of future returns