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Is all Rebalancing Created Equal…and Does it Matter?

Periods of market volatility often represent an optimal time for advisors to work with their clients to rebalance their portfolios. Rebalancing serves multiple purposes. Rebalancing puts investors’ asset allocation strategies back in line with their risk profile and the goals that they are trying to achieve.

If equity markets are down, then allocations to fixed income will go up proportionately. This is particularly true currently when Treasury bond yields are so low, and there may be limited upside price potential. Rebalancing not only brings a portfolio back into alignment, but also accomplishes the proverbial “buy low and sell relatively high.” Rebalancing can provide an opportunity to invest in high-quality securities that were previously considered overvalued and/or sell securities that an advisor feels do not have the same performance potential. But when should you rebalance? A recent article in ThinkAdvisor discusses the main approaches to rebalancing:

While a hybrid approach is structured to benefit from rebalancing while avoiding the negatives, such as transaction costs and short-term gains, research finds that some form of disciplined rebalancing can still deliver better risk-adjusted returns than a portfolio that operates under a “set it and forget it” strategy. In addition, rebalancing gives advisors an opportunity to interact positively with their clients during challenging times, demonstrate a proactive value-added approach and help their clients avoid emotional investing and maintain a disciplined plan.