The importance of strategically rebalancing a portfolio

A (re)balancing act

Published: March 1, 2016

Emotion often plays a role in investing — and some advisors suggest that the best way to take it out of the equation is to “set” the portfolio at the beginning of the year and leave it alone. But uneven growth rates in asset classes and extreme market volatility, such as the disruption caused by the Chinese market and oil prices in 2015, can have a major impact on your portfolio. In other words, you may be taking on a lot more asset risk than you expected.     

A portfolio that starts off properly allocated can be negatively or positively impacted in many ways; but if it is properly monitored and periodically balanced, your portfolio can better align with your objectives and risk profile. Rebalancing can benefit your portfolio by reducing over-weighted positions (selling high) and increasing under-weighted positions (buying low). This may help avoid emotional decision making that can be harmful to your investment strategy. Also, from disruption often comes opportunity; and the “hands-off” approach may miss out on opportunities to buy impacted investments that are currently undervalued. Evidence supports the value of rebalancing; historically, portfolios that have been rebalanced periodically have outperformed a “set it and forget it” strategy — and portfolios that prudently manage taxes during these trades do even better. 

Deciding when to rebalance can be a complex decision. Rebalancing too often can incur taxable gains and costs that eat away at returns. On the other hand, rebalancing too infrequently may cause the positive effects of rebalancing to be insignificant. KF Advisors’s portfolio managers combine their thinking with information from sophisticated tools and technology to carefully monitor and manage each client’s portfolio. We welcome discussion on how we work to keep your portfolios on track to reach your goals. 

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.