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Better Balance

Investments Planning

Anyone who has had a discussion with me about investments knows that I believe that “asset allocation” is one of the most important investment decisions to be made. Your mix of stocks, bonds, cash (and alternatives for more advanced portfolios) will determine the long-term risk you are taking and the gains you might expect for taking such a risk.

It’s important that you go through the process of determining the mix of assets that is best or you:

  • Determine your risk tolerance – how well you’ll sleep at night given the expected “bumps” in your portfolio value
  • Determine your risk capacity – how high your losses can be (temporarily) before your plan has to be changed
  • Determine your risk need – how conservative you can be while still meeting your financial targets

These answers lead you to an asset mix that makes sense for you.  Then what?


Unfortunately, investment portfolios are not “set it and forget it.” A 70/30 portfolio (70% in stocks and 30% in bonds) built at the beginning of 2000 would have become a 60/40 mix after the dot-com correction. That portfolio would have been underweight in terms of stocks (by a full 10%) right before the market took off again in 2003. A disciplined rebalancing strategy would have “topped off” the stocks back to their 70% target, so more of the portfolio grew when those stock market returns turned around. Having no rebalancing strategy results in lower stock allocations after corrections and higher stock allocations before corrections.  Rebalancing is a natural way to buy low and sell high.

Should you rebalance every Tuesday, every month, every quarter, every year, or every leap year? 

For those that are rebalancing, periodic (“time-based”) rebalancing is the most common approach. Lots of research has been done on rebalancing frequency, and the results have been quite consistent… there is little difference in the risk or reward achieved when using monthly, quarterly or annual rebalancing. Since more frequent reviews have no benefit and require more effort and trading costs, annual rebalancing is preferable if basic time-based rebalancing is used.

What about opportunistic rebalancing?

In a perfect world we would use a strategy that holds asset classes as they perform well, triggers a rebalance (sells) right before declines, and then rebalances again (buys) before performance turns up again. Although “crystal ball” rebalancing does not exist, one solid alternative is to rebalance when asset classes get too far away from their targets. 

“Tolerance-band rebalancing” sets thresholds around the asset classes in a portfolio and rebalances only when those thresholds are broken. For example, if my target allocation to stocks is 50%, I might choose to rebalance only when my stock allocation grows to 60% or shrinks to 40%.

Using this method allows asset classes to move away from their targets, but not so much that they overwhelm the portfolio mix. There might be weeks or years between trades based on actual performance as opposed to the calendar. Since trades are minimized, this reduces trading costs and keeps taxes under control.

As it turns out, tolerance-band rebalancing does a great job at keeping portfolio risk in check. Better yet, rebalancing this way has been shown to increase investment returns.  A 2007 study from the Journal of Financial Planning calculated the benefits of properly set tolerance-band rebalancing to be 39 basis points. In other words, opportunistic rebalancing historically increased performance by 0.39%!

Unfortunately, there are no great solutions for the average investor to wisely automate the rebalancing process on their own. Professionals have access to rebalancing software, but fewer than 40% report having any software in this space. These individual investors and advisors are missing out on the benefits of smart rebalancing.

MILE Wealth uses finely-tuned rebalancing software to keep client portfolios in check. The software looks at every client portfolio very frequently (at least weekly) and highlights trading opportunities when they are available. Trading recommendations are reviewed to make sure that they are suitable for that particular client’s situation, and adjustments are made if necessary. 

Opportunistic rebalancing is another example of the things MILE Wealth does behind the scenes for clients. This rebalancing approach is time-consuming, but I’m confident that it’s adding value.