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Portfolio Rebalancing: Required Maintenance or Placebo?

As the stock market slowly comes back, many investors will take this opportunity to rebalance their portfolios. But is this act of tradition truly required maintenance or nothing more than a placebo for concerned investors?

Rebalancing is especially important in volatile markets, says Tim Maurer, CFP and director of financial planning for The Financial Consulate. But people all too often make the mistake of putting their portfolio rebalancing on autopilot. By automatically rebalancing on an annual, quarterly or monthly basis, it can force transaction costs or tax consequences for only minor adjustments. Furthermore, if an asset class starts to run up at the end of a quarter, you may not want to pare back your exposure. The key is strategic rebalancing.

Ivory Johnson, CFP and director of financial planning for Scarborough Capital Management, likes rebalancing as it maintains an investor’s chosen risk/reward ratio. Numerous studies suggest that the timing does not actually impact long-term performance in a meaningful way, assuming you do it at least once a year.. Sell the winners, buy the losers but keep the allocations the same – that is, after all, where 90 percent of returns come from.


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