That is the question. Most financial planners or financial advisors will highlight that rebalancing (at least annually) typically reduces portfolio risk while concomitantly lowering your portfolio’s volatility. Both being a pretty good thing! Yes, it is true, that the potential for greater portfolio gains will be lower with periodic rebalancing because of your lower equity exposure. But, if you are one of those folks that feels the roller coaster ride of the stock market is already wild enough, then rebalancing may be the ticket for tamer rides/returns.
How so, you may ask? Well, let’s first get the assumptions out of the way. In a study on rebalancing, Morningstar looked at a 60/40 stock and bond portfolio from 1994 to 20Mar2020. The model portfolio for this study was allocated as follows: 45% S&P 500 stock, 15% All-World ex-US Index, and 40% Bloomberg Barclay Aggregate Bond Index. Not a bad three fund, low maintenance portfolio.
What did the study show?
A 60/40 stock and bond portfolio put in place in 1994 would have been nearly 80% stock before the COVID-19 stock market crash if you had never rebalanced (notably, an 80% stock exposure is normally too high for someone nearing or in retirement);
A 60/40 stock and bond portfolio put in place in 1994 (rebalanced at least annually) would have suffered a -20.7% loss in the 2000-2001 recession versus -28.3% for a portfolio never rebalanced;
A 60/40 stock and bond portfolio put in place in 1994 (rebalanced at least annually) would have suffered a -31.9% loss in the 2008 financial crisis versus -36.6% for a portfolio never rebalanced; and
A 60/40 stock and bond portfolio put in place in 1994 (rebalanced at least annually) would have suffered a -19.7% loss in the 2020 Coronavirus Pandemic versus -25.7% for a portfolio never rebalanced.
If that was not enough, the study’s authors also point out that your time to recover your portfolio losses was also lessened for a portfolio that was rebalanced at least annually versus one that was never rebalanced. Does this tell the whole story of or for rebalancing? Not necessarily, but it sure does provide a compelling talking point for considering a systematic implementation of rebalancing.
For more information about taxes and rebalancing, see my earlier post here (Taxes-and-Rebalancing) about this topic.
If you have questions about your rebalancing, your retirement plan, or your investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.
For more information about required minimum distributions and rebalancing, see my earlier post here (RMDs-and-Rebalancing) about this topic.
For additional information about this topic, please click here.
David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM. He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton. Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar. For more information about Mr. Hogans and his firm please see his ADV filing with the Securities and Exchange Commission (SEC) .