4 Views On Year-End Portfolio Rebalancing

December 01, 2014

Investors should buy, hold and rebalance, though rebalancing involves some decision-making.

When it comes to ETF portfolios, there’s no such thing as a standard rebalancing schedule that advisors and strategists adopt. But a lot of investors like to reassess where their portfolios stand at the end of a given calendar year.

Headed into December—the last month of 2014—four advisors shared with ETF.com their views on what investors should focus on when looking to rebalance their portfolios:

Mitch Reiner, Principal, Wela Strategies

When rebalancing, we start by talking to investors about looking at their positions that have performed best over the last 12 months. We use the concept that the best performers from one year don't tend to outperform the next. If there is a compelling reason to hang on to your best performers, fine, but start by cutting overweight positions that performed best.

Most importantly, we have to review portfolios and confirm that investors met their objectives for the year. As a precursor to this, you should make sure you’ve defined your goals for different pieces of your portfolio.

We suggest dividing your assets into "growth" and "income" assets. Your growth asset should track market indexes net of fees. Your income assets should generate a predetermined income stream that you establish. Each year, you should determine if your portfolio accomplished these two goals with the assets that have been earmarked for each of these buckets.

Aaron Izenstark: Managing Director/CIO, Iron Financial

There’s only one concept investors should be looking at, and that is to make sure their portfolio is still in line with what their risk tolerance is. That’s where portfolios can get really out of whack, especially if you get into a situation where one of the markets you’re invested in is up big. That may not be the case this year, but that’s what you need to look out for.

That’s the one key factor—risk. There are indirect concepts you look out for such as whether the adjustments you’re going to make have tax ramifications, or whether you’re gifting money at the end of the year. You need to figure out what you will sell, but essentially, you want to make sure you’re not taking too much or too little risk. Investing is about risk, and that has to be your first and foremost priority.

Now, when adjusting your portfolio back to that 60-40 split, or whatever split you set out to have, you don’t necessarily have to sell your winners; you can sell your “dogs” and move into a better asset allocation.

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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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