Once all the heavy lifting of asset allocation, strategy diversification and security selection has been done, investors are free to put their portfolio on autopilot. Set it and forget it, right?

Investment Strategy

As it turns out, it’s not that easy. Since portfolios are made up of securities that fluctuate in value as markets zig and zag, a sound investment strategy will need some maintenance over time. The market’s fluctuations can throw an investor’s asset allocation out of whack, as some parts of a portfolio outperform others. The process of returning investment allocations back to the original targets is called rebalancing.

The reasons behind the need for rebalancing are important to understand. Systematic rebalancing can take the emotion out of investing, and forces investors to “Sell High” and “Buy Low”. A sound rebalancing strategy can also help to smooth out volatility that happens as a result of market fluctuations, and helps to prevent investors from carrying more risk than they planned.

The Importance of Rebalancing

For example, consider a portfolio with two identical holdings, with identical weights, 60% stocks and 40% bonds represented by the S&P 500 index for stock exposure, and the BloombergBarclays US Aggregate Bond Index for bond holdings. The only difference in the portfolios is that Portfolio A uses a “Buy and Hold” strategy, and Portfolio B rebalances quarterly. Take a look at the Morningstar graphic below.


Source: Morningstar Direct. This chart’s hypothetical illustration uses historical monthly performance from February 1976 through September 2017 from Morningstar. The portfolios are represented by the total returns including reinvested dividends of  a 60% position in the S&P 500 index and 40% in the Barclays U.S. Aggregate Bond Index. The 60-40 S&P-Agg Quarterly Rebal portfolio was rebalanced back to target weights at the calendar quarters during the holding period. Chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results.

As you can see from the graph, investors who did not rebalance during the market crashes of 2000 and 2008 fared much worse from both a drawdown and recovery standpoint. During the largest drawdown scenario from 2007-2009, the rebalancing portfolio outperformed during the downturn by roughly 9%, and recovered 14 months faster than the Buy and Hold strategy. From this example it is easy to see why rebalancing is a key component to a sound investment strategy and should not be overlooked.

Our Systematic Approach

At FinTrust, our investment management strategy incorporates a quarterly systematic rebalancing process to take the emotion and guesswork out of portfolio management. Our investors can be confident that their portfolios are being managed to keep them on track, so that they may reach their long term goals. To learn more about our investment process or to speak with an expert, take the next step. Call us at 864-288-2849 or submit a contact form.