REBALANCING

As market forces cause various assets to rise or fall in value in the portfolio, the current asset mix will deviate from the policy asset allocation. We advocate annual rebalancing primarily to maintain the target level of risk the client has determined is appropriate for them. We do not recommend more frequent rebalancing, which could result in excessive tax and trading costs. Because rebalancing requires contrarian behavior (in the case of a market decline, buying more stocks to raise the stock allocation to target or in the case of market increases, selling stocks to reduce the stock allocation back to target), discipline is essential.

Studies of mutual fund flows show the opposite behavior occurs in practice – investors buy stocks at market highs and sell stocks at market lows. Avoiding this performance gap through disciplined risk management is one of the key benefits we aim to provide investors.