BWFA provides fee-only fiduciary standard investment management that focuses on long term decision making.
We avoid short term trading, market timing and emotional reactions to day-to-day volatility, to provide clients with investment results to meet their individual needs over their lifetime.
As your investment advisor we continually look for new opportunities and determine the right balance across various areas of investments. Part of that process is the rebalancing of portfolios. During 2022 there were some outliers that provided much of the market performance; energy stocks and more generally value stocks versus growth stocks. In addition to growth versus value, decisions must be made on U.S. versus international investing, stocks versus bonds, real estate versus cash and so forth.
REASONS WHY WE REBALANCE
Rebalancing can reduce overall portfolio risk by taking money from areas that are extended and doing well (overallocated) and redeploying to areas that are not as extended.
Rebalancing can help to diversify a portfolio. As above, when there is overallocation, you may lose some diversification if left unchecked, since some stocks or investments grow to a larger percentage of your portfolio. Rebalancing spreads things around better.
Emotional decisions are avoided when you rebalance on a periodic basis. It can be difficult to sell “winners” to buy “losers” during the rebalancing process, which is what in effect occurs. However, it is something we continue to do, particularly in retirement accounts (e.g., IRA, 401k, 403b, TSP) where these changes can be done without current tax consequences.
Rebalancing can reduce overall portfolio risk by taking money from areas that are extended and doing well (overallocated) and redeploying to areas that are not as extended. Rebalancing can also help to diversify a portfolio.
There was an old, and now maybe obsolete, rebalancing rule of thumb to “take 100 minus your age”, and that is the percentage you should have in stocks. The idea is that you own less stocks as you age. This seems an intuitively sound approach, but it would have been detrimental to investors with long term goals based on growth of their assets, to continue to retreat from stocks in the last 10 years in particular. So, rebalancing requires more work to determine the best approach, given the overall investment circumstances.
REASONS TO REFRAIN FROM THIS APPROACH
When rebalancing, one might assume that the past will dictate the future. High performing stocks or investment allocation categories will adjust down in price eventually, and lower performing stocks or allocation areas will go up — this is not necessarily the case — “high priced stocks go higher” is one Wall Street adage that will often play out. So, when rebalancing you might “miss the upside” by rebalancing away from these better performing assets. Conversely, buying into lower performing investments when rebalancing may not always be optimal. Sometimes, low performing areas are that way for a reason — certain depressed sectors for example exhibit exceptionally low growth rates over a long time, so why buy into those?
Another challenge to rebalancing is the potential conflict with “buy and hold” strategies or with tax loss harvesting decisions to balance out gains.
The BWFA Investment Committee continually analyzes the positives and negatives of rebalancing and looks for opportunities to positively impact client portfolios through thoughtful rebalancing.
JOSEPH MANFREDI
MBA
COO, Senior Portfolio Manager & Executive Manager
jmanfredi@bwfa.com