Updated Thursday, August 21, 2014 as of 4:14 AM ET

Portfolio Rebalancing: Get It Right

What is the best thing you can do to improve your clients’ portfolio performance? For a long time, the accepted answer was simple: asset allocation. Now, however, it appears that there is a second factor that might just be more important: consistency in that asset allocation, as maintained by steady rebalancing.

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Comments (8)
This article and the earlier comments seem to buy into "the goal is to maximize portfolio value." That is not the goal of a 'real portfolio'. The purpose of a real portfolio is to meet identified financial goals with high confidence and low enough volatility so that the client can be convinced to maintain the portfolio. Thus, the question is not whether rebalancing increases return, the question is does it achieve a required level of return with less volatility than the non-rebalancing alternative(s) and/or with greater certainty. This article does not answer that, although I find it very interesting.
Posted by Vernon C | Tuesday, June 03 2014 at 3:40PM ET
Good point. It doesn't answer that because in many periods rebalancing doesn't reduce volatility, but actually increases it.

And the performance of a rebalanced strategy is itself very dependant on the chosen asset classes.

For example, suppose you choose to include long term treasuries to include in your portfolio, and during a long period of rising interest rates kept buying more and more, your portfolio would certainly display greater volatility than keeping the original allocation in long term treasuries constant, (thereby diminishing the effect of the losses ((as the treasuries occupy a smaller and smaller portion of the portfolio)).
Posted by WILLIAM K | Thursday, June 05 2014 at 11:49AM ET
My Name is Michael Chindamo. I am the co-founder of Fautores Family Offices. I often wonder what the next grand strategy will be. Strategies described in the article are all about enabling advisors to attract assets under management from the masses.
Investing in general should be all about preservation of one's purchasing power. Preservation of one's purchasing power takes into consideration all of a client's assets and expenses. Wise investors diversify their holdings into many viable assets. It is most important to consider directly owned real estate, art, collections etc., no matter what level. For instance, many years ago my wife and I purchased some antiques for a few hundred dollars each. In today's market they are worth many thousands. I learned the lesson many years ago from an extremely wealthy entrepreneur about the benefits of diversification and the importance of buyng businesses vs. indexes and ETF's. It's all about buying quality at value prices (Warren Buffet) and holding high quality investments for an appropriate time that is suitable to an investors life style.
Often, the assets may find there way to their heirs.
The next point is the importance of purchasing goods at wholesale pricing. Take for ex. Costco. Great business model. They have 4,000 items on the shelf that are higher quality vs. Sam's club's 20,000 lower quality items. Costco offers more quality at less prices rather than low quality for cheap prices (Sam's Club).
We believe that buying high quality goods and services at a bargain (value) equates to preservation of ones purchasing power. This could equate to buying the house next door for cash during a depressed cycle and renting it. You control the asset, you purcahsed it at a discount and have in essence created a bond with an inflation hedge.
That said, you might be able to achieve some of this strategy with stock market investing if you apply the value principles and be prepared to do your homework.
The US is moving in a direction where manufacturing, energy and technologies are taking great hold. There are lot's of opportunities.
I would suggest that the masses look for professional and well credentialed advisors that operate under a fiducary format. Then I would engage them in conversations that relate to one's long-term financial planning, asset protection, estate planning , tax scenarios, family values
and educating their heirs. Once an advisor can aid in all of the alignment, then construct an appropriate asset allocation model that takes into account assets that are invested in the market as well as outside investments.
The typical chase for AUM is a disservice to all investors. Comprehensive financial planning, behavior management, and long-term investing will result in better outcomes.
Posted by Michael C | Saturday, June 07 2014 at 8:48AM ET
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