Why investors need to keep their balance

Investors seeking particular long-term outcomes need to achieve and – just as importantly – retain healthy long-term returns. To meet these objectives with the least amount of upheaval requires a portfolio that seeks consistent risk-adjusted returns. We argue that an active rebalancing policy is essential. 

While such a policy should follow set rules, it also necessarily requires judgement. Not only do investors have to decide whether to rebalance or not, but also how frequently, the target allocation and the way the strategy should be implemented, among other things. As an integral part of the investment process, it should bring rigour and discipline to the construction of the portfolio, leading to better risk-adjusted returns.

The frequency of the rebalancing decision will represent a trade-off between returns and costs. Timing rebalancing strategies based on economic environments is difficult, but having such a policy in place should help greatly during times of market stress. Even during times of strong positive market momentum, rebalancing produces superior risk-adjusted returns compared with doing nothing. Rebalancing thus represents free long-run risk management and also forces investors to be honest about whether and how they are achieving their aims.