“Life is like riding a bicycle. To keep your balance, you must keep moving.”
Recently, you may have noticed some adjustments in your portfolio. This activity is an example of how we use the science and technology of investing along with our core investment beliefs to keep your portfolio in balance. Why? Your portfolio starts off with a recommended asset allocation that is implemented through carefully selected investment strategies. But over time, individual securities and asset classes experience differing rates of return and are also affected by market volatility. These factors can result in some asset classes being overweight versus your targeted asset allocation, while others may now be underweight. In other words, your financial exposures have shifted and you may be taking on a different amount of asset risk than you expected.
Klingenstein Fields Advisors (KF Advisors) believes that regular monitoring and periodically rebalancing your portfolio helps keep it aligned with your objectives and risk profile. Rebalancing your portfolio has two key benefits:
- Reduces overweight positions (selling high) and increases underweight positions (buying low)
- Helps avoid emotional decision making that may negatively impact your investments
Some may follow an approach of setting an asset allocation and leaving it alone. But this approach can result in excessive risk concentration and missing out on opportunities to buy undervalued investments that have been negatively impacted in market turmoil. Historically, portfolios that have been rebalanced regularly 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 is itself a balancing act. Rebalance too frequently, and taxes on gains and transaction costs can erode returns. But if you don’t rebalance enough, potential positive effects may be minimal. KF Advisors’ portfolio managers combine their thinking with information from sophisticated tools and technology to carefully monitor and manage each client’s portfolio.