Ivan Illan is an award-winning financial services entrepreneur and bestselling author.


Investors are optimists. Buying a public company’s shares today is a hopeful act that those shares will be more valuable in the future. A big challenge is holding onto that conviction during highly volatile market conditions. Not only does it take steely nerves to ignore short-term market crashes, but investors are constantly seeking ways to earn more portfolio return. So, forget about market timing, meme stocks or other siren calls. Instead, look to a basic time-proven way to enhance portfolio returns.

Using our firm’s subscription to YCharts, I conducted a basic analysis of one such way: portfolio rebalancing. Simply explained, every diversified portfolio has a starting percentage allocation to various holdings and/or asset classes. As the holdings change in price, their original portfolio weightings could get way out of whack from an investor’s intended exposure. This happens often during sustained equity bull markets, where the fixed income (aka, bonds) allocation would become a smaller portfolio allocation. This occurs simply because of its lower relative value to equities in the same portfolio — even though it hadn’t lost any nominal value of its own.

To start my analysis, I examined a simplified portfolio consisting of only two indexes for illustrative purposes, since you can’t invest directly in indexes. The period was September 3, 2011, through September 2, 2021. Stocks were represented by the MSCI ACWI Net Total Return index, which includes publicly traded companies from developed markets around the world, including the U.S., weighted in relation to a market’s total capitalization. Bonds (aka, fixed income) are represented by the Bloomberg Barclays Global Aggregate, which includes a couple dozen global developed markets and their investment grade corporate and government issuers. For comparative analysis, I pulled the historical total return performance on two portfolios using these two index holdings. One portfolio was rebalanced to a target 60% stocks/40% bonds every calendar quarter since inception. The other portfolio was never rebalanced after being initially allocated into 60% stocks/40% bonds. The results were interesting.

Over its 10 year history, the quarterly rebalanced portfolio had an annualized total return of 7.91%, while the portfolio without rebalancing returned an average of 7.53% annually — a difference of 0.38% per year in favor of the rebalanced portfolio. Though it may not sound like a huge number, the power of compounding means that small numbers over long periods add up. From December 28, 2000, to September 2, 2021, an initial $10,000 investment into the non-rebalanced portfolio grew to $32,900.76, while the quarterly rebalanced one ended up at $35,060.95.


More importantly, the risk of each portfolio changed dramatically over time. The quarterly rebalanced portfolio ended with a 60.62% stock/39.38% bond allocation, which makes sense since it routinely was adjusted back to the original allocation. The non-rebalanced portfolio ended with a 69.81% stock/30.19% bond allocation. As a result, the year-to-date total returns (through September 2, 2021) were 10.28% on the non-rebalanced portfolio versus 8.92% for the quarterly rebalanced one (a 136 basis points difference because of the much higher non-rebalanced portfolio’s allocation to stocks during a period when stocks have been significantly outperforming bonds).

These short-term performance differences can impact an investor’s decision-making process. That feeling of regret on having “missed out” on returns, especially when a diligent investor had been executing a rebalancing program, is the stuff bad decision-making depends on.

Instead of just throwing out rebalancing as a necessary discipline, an investor might instead conduct strategic (or “smart”) rebalancing. This approach might ignore arbitrary quarter-end calendar dates in favor of “drift” targets, where once a percentage threshold is breached, a rebalance would be triggered to bring the portfolio back into its original allocations.

Rebalancing is not a panacea, meaning there are downsides. For example, if you’re rebalancing too frequently, selling portfolio winners and then buying losers, you’re potentially giving up greater total return. Holding onto a security that continues to climb higher is a clear way to achieve portfolio growth. I’ve seen investment management services that offer daily, weekly or monthly rebalancing. These seem like overkill to me and precisely the kind of strategy that can detract from optimal total return over time.

Regardless of the way it’s executed, rebalancing routinely affords an investor that comfortable feeling of selling high and buying low through a strict discipline, not emotional reactions.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. CRN202409-851198

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