4 Views On Year-End Portfolio Rebalancing

December 01, 2014

Wayne Schmidt: CIO, Gradient Investments

Annually is an appropriate time frame to consider portfolio rebalancing, and doing it prior to year-end gives investors the opportunity to also consider their tax situation coming into the end of the year. But I view taxes as a secondary consideration while assessing the portfolio’s overall risk. How well it meets the investment objectives is the most important rebalancing decision.

If portfolios were properly constructed from a risk standpoint one to three years ago, it’s likely they’re riskier today, as stocks have appreciated relative to bonds. This is a good time to reset the portfolio allocation back to the desired risk tolerance.

I would not make drastic changes to the portfolio; rather, investors should implement small changes at the margin. Portfolios should have a long-term focus—staying invested is the key to long-term success. Time in the market with the proper allocation versus trying to time the market will deliver the best results.

Ric Edelman: Head, Edelman Financial Services

We don’t believe in calendar rebalancing. It’s inefficient and ineffective. We rebalance on a percentage basis. So we’ll assign each asset class a certain drift parameter. We’ll allow an asset to drift up or down within those parameters. If the asset drifts beyond those parameters, that will trigger a rebalance.

We’re examining every client’s account on a daily basis to identify those anomalies. It’s far more efficient, far more effective, to succeed in a rebalancing approach.

This past couple of months proved that perfectly. September was the quarter-end. So anybody rebalancing on a calendar basis balanced at the end of the quarter. But the S&P was only down about 2 percent as of the end of September.

By the middle of October, the first two weeks of October, the S&P was down another 6 percent. If you were rebalancing by calendar, you missed that. We were able to capture it, and 94 percent of our clients had their accounts rebalanced.

Ultimately, you don’t want to own a portfolio where everything goes up and down simultaneously.



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