Rebalancing Your Investment Portfolio


Consistency is the key to rebalancing your investment portfolio. Consistency removes (or mitigates) emotional decisions. Emotional decisions stem from bad judgement, which stems from randomness and inconsistency.

There are two rebalancing philosophies: a scheduled “time-frame” based process and an “as-needed” process. No matter what method or timeframe you choose, stick with it!

Time-frame rebalancing requires you flip on the computer, run the calculations (typically with a spreadsheet or similar tool) and place trades. This may happen annually, semi-annually, quarterly or even monthly. Rebalancing on a time-frame basis is highly beneficial in helping you become a successful investor. But when is it best to rebalance?

If you have the emotional fortitude, time and ability to take rebalancing one step further, rebalancing “as-needed” really produces profound benefits. It isn't easy and it takes a fair amount of time however.

First you'll need to have specific tolerance ranges (such as one or two percent) and minimum trade sizes (such as 100 shares or $ 2,500 minimum trade size) depending on your account size. These ranges trigger rebalancing trades when they're needed , not on some arbitrary day of the year. This allows you the opportunity to take full advantage of intra-year asset class swings.

Rebalancing opportunities may not present themselves on some arbitrary date (such as once per year) as they do throughout the year. A consistent program of rebalancing is only as good as its implementation, and buying low / selling high when the opportunity presents itself is far more advantageous than the lazy man's route of once a year (or worse yet, not at all).

For example on January 1st, 2007 the S&P 500 started at 1,407. On December 31st of that year the S&P 500 ended at 1,411 – essentially a flat market for 500 of the largest US stocks. Yet on October 8th of that year the S&P 500 reached a high of 1,565. That's a mid-year gain of over 11% and would have been a great time to rebalance!

In fact there were multiple opportunities in 2007 to rebalance, including a low of 1,374 on March 5th and a high of 1,553 on July 19th. Each opportunity to sell high and buy low would have been missed by the novice investor (or financial advisor) who neglected reviewing their investment portfolio daily.

If you're not rebalancing “as needed” on your own, consider hiring a financial advisor (Google the National Association of Personal Financial Advisors) to monitor your portfolio daily and execute these trades for you – they may very likely pay for their fees simply by “babysitting” your portfolio's rebalancing needs.

You may think I'm data mining and I'll be the first to admit there are many years when annual re-balancing performs just fine. However, there are plenty of years when seemingly “stagnant” markets existed yet re-balancing still would have presented many advantages.

Take for example 2011. On January 3rd, 2011 the S&P 500 opened at 1,271. On December 31st it closed at 1,257 – a meager 1% fluctuation for the year. Upon closer observation the S&P 500 hit a low of 1,099 the third day of October, 2011. That's over a 13% decline from the indexes open of 1,271. Wouldn't it have been nice to be investing into stocks as they drop and selling them as they rise? Rebalancing on an “as needed” basis does just that!

Never rebalancing is clearly the least productive investment strategy. Rebalancing at least yearly makes a great deal of sense for most investors. For investors with the technology, time and tools to rebalance “as needed” (or a financial advisor with those capabilities) investment returns should be bolstered by the extra time and effort!

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