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The Underestimated Power of Rebalancing

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The Underestimated Power of Rebalancing

In much of the investment industry, rebalancing is thought of as a calendar to-do item – it’s January 1st? Must be time to rebalance!

Or maybe you might rebalance quarterly or monthly, etc.

At Tumwater, we think rebalancing should happen only when things get out of balance. We believe it’s important to monitor each investment in a portfolio on a daily basis so we know when it gets out of balance and can take action to put things right again.

During the Covid 19 bear market (and record-breaking recovery), rebalancing their portfolio helped investors avoid being too conservative or too aggressive by accident.

A good rebalancing discipline sets intelligent tolerance bands to notify you when the portfolio needs to be rebalanced.

At Tumwater we use a 15-20% tolerance band for each investment.

For example, imagine you want to hold 25% of your portfolio in a particular fund. A 20% tolerance band means you wouldn’t want your fund to move 5% in either direction.

If it ever drifted outside of that tolerance band it would be time to rebalance the portfolio to get it back to 25% of the portfolio.

This tactic ensures your portfolio maintains the asset allocation targets you set out originally – it doesn’t accidentally become more and more aggressive (or more and more conservative) over time in any one investment.

Rebalancing also helps the portfolio stay diversified rather than becoming more and more concentrated into whatever investment has done the best.

Rebalancing is a reset button for your investments.

When you build your portfolio the right way, every investment is carefully chosen to work in harmony with every other investment.

Each one has its own unique part to play in the portfolio.

Over time, the fastest growing investments become a larger and larger piece of the portfolio.  The longer this goes on, the less the portfolio resembles how you set it up to begin with.

For instance, since the 5 largest companies in the S&P 500 have grown to be 20% of the overall index, this could indicate the need to rebalance your index investment to lock in that growth.

When you rebalance, you take the portfolio back to the original design.

But how do we know when to rebalance?

It depends on how much time you want to devote to monitoring them.

We track each investment in each client portfolio daily so we know when any get out of balance and can take action to put it right.

You may not have the time or the tools to track it that frequently and may just need to evaluate it monthly, quarterly, or annually.

But however frequently you look at it, setting triggers to rebalance your own portfolio is a sure-fire way to invest well over time.

Repeated consistently over years and decades, the rebalancing discipline enables investors to even outperform their own investments simply because they buy more of any investment when it’s price is low and sell a bit of any investment when it’s price is high.

We explore rebalancing and more in our new 9-Email Course: Foundations of Financial Success.  Sign up here for free!


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