Why is portfolio rebalancing important?

Baron Financial Team Answers Questions About
“Your Personal Economy^SM”

Presented by Victor Cannillo, NAPFA-Registered Financial Advisor

Originally posted on October 27, 2021, this video is an important reminder of
what we do for our clients on a regular basis, no matter the market environment.  

View or listen to our video to learn more

Rebalancing is one of the most important tasks we perform as we manage our clients’ investments. It is important that you understand the term “opportunistic rebalancing” and how it relates to your portfolio. Victor Cannillo, Wealth Management Principal at Baron Financial Group, answers these questions about rebalancing:

What is it? Why do we recommend it? And how frequently will we employ it?

What is it? 

When creating your long-term investment plan, we create a strategy consisting of different types of investments, such as large companies and bonds. We assign target percentages or allocations for each type of investment in your portfolio. As time passes, investments gain or lose value and the asset allocation can deviate from the desired strategy. Rebalancing is buying or selling investments to bring your portfolio back to the target strategy, similar to pruning your garden. 

Why do we recommend it? 

Because people are hardwired emotionally to want to sell when nervous, typically when markets are low, and buy when excited, typically when markets are high, rebalancing provides a systematic and non-emotional way to do the opposite - buy low and sell high.

The process not only forces us to sell when prices are higher, on a relative basis, and buy when prices are lower, on a relative basis, but it can also reduce long-term portfolio volatility. Rebalancing is necessary to achieve the value-added benefits of diversification.

Another benefit of rebalancing is that it is a type of “pre-commitment plan”. It takes emotion and guess work out of the decision, which is what we want to do - control the controllable.

But aren’t we missing out on gains because we’re selling asset classes that continue to outperform? That’s a good question. The answer is we are only selling the amount that has appreciated on a relative basis to other assets.  We remain invested in the investment based on the original percentage identified in the plan.  

Rebalancing facilitates the capture of the gain before the asset class experiences a correction. Because no one can consistently and successfully time the market, allowing your investments to be overexposed because they are appreciating, in order to ride the wave – is a risk, we believe no long-term investor should take. 

In our opinion, rebalancing makes sense whether the economy is in the throes of a terrible recession or in the midst of a great manic bubble.

How frequently will we employ it? 

Earlier I referred to the term opportunistic rebalancing. It’s important to understand that we rebalance portfolios when the opportunity presents itself. 

When market fluctuations cause the allocation percentage to be out off-kilter, within a certain pre-determined range, we then rebalance. 

Rebalancing can help take the guesswork out of investing. While we certainly don’t depend on crystal balls to make investment decisions, we do trust in our long-term financial plans for our clients. The decision to buy or sell isn’t based on hopes or fears of where the market is heading, but instead, it forces changes solely because asset classes are out of whack with your long-term plan.

For our clients

We will continue to buy assets we consider to be quality but are currently underperforming and sell portions of investments that are outperforming as we rebalance your portfolio, finding steady growth where we can, with the goal to build wealth to help you reach your goals. In our opinion, rebalancing is vital to helping you reach those goals and is an essential component of any investment strategy.

Please contact the Baron Team with any questions or if you would like a free second opinion on your portfolio.

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Disclosure: This is a general communication being provided for informational purposes only. Past performance is no guarantee of future results. Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research, tax, or investment advice. Please consult your financial planning and tax professional for personal advice. ©2021 The Behavioral Finance Network. Used with permission.