Portfolio Positioning: A Rebalancing Act

A key component to both financial planning and long-term investing is ensuring you have the proper asset allocation that suits your needs. Every asset allocation decision is unique and is based on your goals and risk tolerance, which is both the willingness AND ability to take risk. Once an allocation is chosen, it should serve as a guiding light. When the portfolio’s actual allocation moves well outside of your chosen allocation, it is likely time for a rebalance. We examined what a traditional 60/40 portfolio (60% S&P 500, 40% Bloomberg U.S. Aggregate Bond) would look like at different dates if it was not rebalanced. 

Source: Morningstar as of 06/30/2022. Quarterly rebalance and buy-and-hold strategies are composed of S&P 500 and Bloomberg U.S. Aggregate total return indexes on a monthly basis.

Source: Morningstar as of 06/30/2022. Quarterly rebalance and buy-and-hold strategies are composed of S&P 500 and Bloomberg U.S. Aggregate total return indexes on a monthly basis.

As of 06/30/22, this buy-and-hold portfolio would be 80.9% stocks and 19.1% bonds – that is a far cry from the 60/40 starting point! In the words of Yogi Berra, “If you don’t know where you are going, you’ll end up someplace else.” With this rise in stocks as a percentage of the portfolio, a stock market drawdown could provide significantly more harm to a buy-and-hold investor than an investor who rebalances. If we simply look at a portfolio that is rebalanced quarterly, it provides nearly all of the same upside as the buy-and-hold portfolio, while having a significantly larger bond cushion in the event of a stock market decline or if you need to take withdrawals during a period of distress. 

Source: Morningstar as of 06/30/2022. Quarterly rebalance and buy-and-hold strategies are composed of S&P 500 and Bloomberg U.S. Aggregate total return indexes on a monthly basis.

How do we approach rebalancing? At XPYRIA, we opportunistically rebalance portfolios in order to buy when markets decline and trim when markets rise – this contrarian approach allows us to look through short-term noise and “buy low, trim high.” This opportunistic process can potentially provide a larger benefit than the simple calendar-based rebalancing process that we have shown in the previous charts. Rebalancing becomes of paramount importance as you approach, or are in, retirement and withdrawal mode. We seek to rebalance to maintain portfolios in line with a client’s long-term asset allocation, which provides the best risk/reward opportunity for clients to meet their financial goals.