From October 2018, through mid-June of 2019, trends have reminded investors that capital markets can very quickly move up and down in value. During this recent time period, US equity markets saw a drawdown of -20% before subsequently recovering and moving higher, as measured by the Russell 3000 Index. At the same time, the US bond market saw an increase of almost 8.5%, measured by the Bloomberg Barclays US Aggregate Bond Index. These kinds of price movements often lead to portfolio’s becoming “out of balance,” relative to their original asset allocation targets.
The primary reason for portfolio rebalancing is to maintain the risk profile of the policy portfolio that the client has chosen. However, periodic rebalancing has the added benefit of “buying low” and “selling high”. For example, during a period when stocks are up and bonds are down, the portfolio likely would become overweight stocks and underweight bonds. To rebalance back to the policy portfolio, stocks would need to be sold “at a high”, and bonds would need to be bought “at a low".”
At Foster Group, we systematically review client portfolios every 6 to 8 weeks and rebalance as necessary. When will Foster Group rebalance a portfolio? In general, if a portfolio’s stock to bond mix is +/-1% of the target allocation, we rebalance the portfolio. We also rebalance the individual investments (e.g. asset class mutual funds) that make up the portfolio using that same criteria.
Other important considerations taken into account when deciding to rebalance a portfolio include:
- Transaction Costs: Foster Group strives to reduce trading expenses whenever possible. We give careful attention to situations that would require several trades to rebalance an account.
- Tax Costs: Foster Group will make every effort to avoid incurring taxes from capital gains whenever possible while still considering the overall risk profile of the portfolio.
- Market Dislocation: Although rare, there can be time periods when asset prices may not accurately reflect information. These time periods are generally due to lack of liquidity, coupled with extreme volatility, such as the 2008 financial crisis. These time periods tend to be very short lived, so Foster Group may suspend rebalancing for a very short period of time (days or weeks) in an effort to reduce the transaction costs related to constantly rebalancing a portfolio.
Foster Group truly cares about our clients’ goals, whether you’re planning for your family’s future or planning to make the future better for people on the other side of the world. If you would like to know more about how, when, and why we rebalance portfolios, please give us a call.
All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. Target asset allocations may change due to market conditions and investment decisions.