Rebalancing is the process of reallocating assets back to their predetermined target weightings. Overtime, as segments of the portfolio perform differently, the portfolio’s asset allocation will change causing a deviation in its expected risk and return. The primary purpose of rebalancing is to maintain the structural integrity of the portfolio to deliver a more consistent and predictable investment experience.

Most investors employ a methodology of rebalancing on a periodic basis with time being the determining factor, such as once every six months or every year. We feel this is not a prudent method. Instead of letting time dictate when to rebalance, we employ a methodology in which the determining factor is based on the unique risk characteristic of the individual components of the portfolio.

By understanding the risk characteristics embedded in every asset held, we are able to place tolerance bands around a targeted allocation that allows for natural movement yet still maintains the risk/return profile of the portfolio. Based on the historical standard deviation of the asset; the riskier the asset, the wider tolerance range is assigned. Basing the rebalancing decision on risk as opposed to time has several benefits.

Unlike time-based rebalancing, which can allow the portfolio to deviate from its target weightings during volatile markets between rebalancing dates, a risk based methodology rebalances positions that are in violation of their target weighting as they occur. This allows for greater control over the portfolios level of risk at any given time. As the portfolio is continuously monitored, this ensures it will always be in adherence to its long-term asset allocation.

In addition, while many time-based methodologies rebalance the entire portfolio back to its target weightings, a risk-based methodology only rebalances assets that are causing a material change in the portfolio’s overall risk profile. This allows for a more cost effective and tax efficient portfolio.



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