The Benefits of Rebalancing

If you created a portfolio of investments yourself and you leave it alone, you may find that over time, your portfolio would deviate quite significantly from your original targeted asset allocation. This may cause your portfolio to experience greater volatility and your returns to be less optimized.

All About Rebalancing

Rebalancing is a technique that removes emotions from investing and enables investors to ensure that their portfolio maintains its original asset allocation. With rebalancing, you would take profits from the best performers and re-invest the profits into the underperformers.

The principle behind rebalancing is simple: no single market will be the best performing market continually, nor will any single market be the bottom performing market for long. As the various economies and financial markets undergo their respective cycles, the method of rebalancing will result in one buying assets when they are cheap and selling assets when they have risen in price. This makes for stronger returns in the long term.

To demonstrate this principle, let’s assume an investor invests in an aggressive portfolio that conforms to our asset allocation of 90% equities and 10% fixed income as per our Aggressive Model Portfolio on 1 January 2001, and he decides to rebalance every year on 1 January. This is compared to an investor who simply adopts a buy and hold strategy. The difference can be seen below:

The rebalanced portfolio outperforms the buy and hold portfolio with higher returns and lower volatility levels.

Where Does FSM Managed Portfolios Come In?

At FSM MAPS, we monitor your portfolio closely to identify the "trigger point" of rebalancing. We think about how frequently the portfolio should be rebalanced; how far an asset allocation can deviate from its target before rebalancing; and whether rebalancing should restore the portfolio to its guideline target allocation or to an approximation of the target.

We strive to maintain the risk-return characteristics of each portfolio and control the cost of rebalancing. We ensure that the portfolios are well-positioned to exploit opportunities and reduce foreseeable risks.