Losses Can Be Worsened When Rebalancing Periodically Without Regard to Where Markets Are Heading
Three weeks ago we introduced you to the “Seven Things Every Investor Should Have Learned From 2008”. Today we will discuss one of them and what you need to do because of this information.
Financial professionals have long preached to buy and hold a diversified portfolio to achieve long-term objectives and use a strategy called Asset Allocation. Part of Asset Allocation process is to rebalance your portfolio periodically to the model and to do so routinely without regard to the direction of the markets. Our analysis of 2008 indicates that a UN-REBALANCED portfolio comprised of 50% stocks and 50% bonds would have out-performed by 1.8% that portfolio of the same allocation that was REBALANCED quarterly.
The process of rebalancing the portfolio can actually increase the portfolio’s risk if performed without regard to the direction of the markets.
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