Why Rebalancing Matters: Keeping Your Portfolio on Track

Rebalancing keeps a diversified portfolio aligned with its targets by trimming outperformers and adding to underperformers. Focus Partners’ Chief Investment Officer of Systematic Strategies Kevin Grogan shares how this strategy can help mitigate risk, maintain discipline, and help investors stay focused on long-term goals, rather than short-term market swings.

When markets move sharply, whether up or down, investors often feel the urge to act. But sometimes the most important action is the one that you’ve planned in advance.

Rebalancing Can Help Bring Your Portfolio Back Closer to Its Targets

When you own a diversified portfolio, your goal is to own a variety of different asset classes that will perform differently from one another in different market environments.

Over time, the winners will become a larger portion of your portfolio. When that happens, the risk level of your portfolio can quietly rise over time as the portfolio becomes more concentrated in those asset classes that have performed well. Rebalancing trims what has outperformed and adds to the areas that have underperformed. It’s essentially a disciplined way of selling high and buying low.

This Can Be Difficult to Do in Practice From a Behavioral Perspective

When something has been performing well, trimming it can feel uncomfortable. When something has struggled, adding to it can feel counterintuitive.

Markets move in cycles, and the portion of your portfolio that’s outperforming today could be underperforming tomorrow. Rebalancing is somewhat analogous to exercise—after you’ve had a very difficult workout, oftentimes the next morning can feel sore and uncomfortable. But that discomfort is a sign that you’re disciplined and your exercise plan is working.

That discomfort you feel from selling the thing that has performed really well recently, and adding to the thing that has performed poorly recently is a sign that you’re disciplined; your long-term plan is working.

Conclusion

Rebalancing is not primarily about boosting your overall returns, but it’s about controlling the risk level of your portfolio and preventing your portfolio from becoming overly concentrated in one or two different asset classes. It helps your portfolio stay aligned with its long-term objectives. And in volatile markets, discipline matters. Rebalancing isn’t about reacting to the moment, it’s about staying aligned with your long-term plan.

 

The information provided is educational and general in nature and is not intended to be, nor should it be construed as, specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective should assume the above information serves as the receipt of, or substitute for, personalized individual advice.  

This reflects our opinions, may contain forward-looking statements, and presents information that may change. Nothing contained in this communication may be relied upon as a guarantee, promise, assurance, or representation as to the future. Past performance does not guarantee future results. Market conditions can vary widely over time, and certain market and economic events having a positive impact on performance may not repeat themselves.  Investing involves risk, including, but not limited to, loss of principal. Our opinions may change over time due to market conditions and other factors. Numerous representatives may provide investment philosophies, strategies, or market opinions that vary. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  

This is prepared using third party sources considered to be reliable; however, accuracy or completeness cannot be guaranteed. The information provided will not be updated any time after the date of publication.