Updated Thursday, July 31, 2014 as of 7:33 AM ET
When Should You Rebalance Client Portfolios?
Monday, October 14, 2013

Conventional wisdom is that portfolios need to be rebalanced regularly. For many advisors regularly means annually.

Financial planner Kevin Brosious tells clients, “At least once a year, we will consider rebalancing.” But he believes that portfolios often benefit from “opportunistic” rebalancing. Brosious, president of Allentown, Pa.-based Wealth Management, rebalanced one client’s portfolio three times last year.

Most of his clients had two rebalancings. That was because of the strong performance of domestic equities last year. “I do have tolerance ranges for the different asset classes,” says Brosious. “Once they’re exceeded, I would certainly consider doing an opportunistic rebalancing.”

Planner Shelley Ferro has a slightly different take on the rebalancing topic. The founder of Ferro Financial in Metairie, La., rebalances at least annually. But usually, if the rebalancing is ahead of schedule, it will suffice for the year.

What percentage gain in an asset class would trigger a rebalancing? “I can’t really say I have a magic number,” says Ferro, who typically monitors seven asset classes in client portfolios. But she does say that a run-up of 10% or more warrants closer scrutiny. “It forces you to look at it,” she says.

Rebalancing may take on extra importance for clients holding long-term bonds. With rates bound to go up eventually, these instruments can guarantee losses. “I never put longer-term bonds in any client’s portfolio,” says Brosious, who views the potential reward as too meager for the risk.

“I don’t have anything in long-term bonds at this point,” says Ferro, who is also underweight in intermediate bonds. Even so, she sees fixed-income assets as a stabilizer. Intermediate bonds have declined slightly this year, but, recalls Ferro, in 2008 equities tumbled precipitously. “Those bond positions helped the overall portfolio,” she says.

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(1) Comment
Research has shown that range-based rebalancing programs are more effective than time based ones. Rebalancing programs must be formalized and mechanized to be effective, as they are very difficult to implement on a discretionary basis.


A formal program can be very valuable for a client's portfolio.



Posted by Kal S | Monday, October 14 2013 at 8:05PM ET
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