After the recent sell-off and market rebound, investors should take the time to review exchange traded fund portfolio holdings and rebalance positions that have appreciated and add to those that have dipped.
While rebalancing may help improve returns, the simple portfolio management is a risk-minimizing strategy that any investor can implement on their own, writes Ilana Polyak for CNBC. [ETF Investors Shouldn’t Overlook Rebalancing]
“People don’t want to rebalance when the stock market is doing well,” Colleen Jaconetti, a senior analyst with Vanguard’s Investment Strategy Group, told CNBC. “But what if the stock market did drop 20 percent and they had not rebalanced?”
If investors forgoes a portfolio rebalance, Jaconettii argues that investors may end up with a larger position in equities than they are comfortable with. Consequently, when a correction does hit, the investor may find that they are uncomfortable with the amount of risk he or she is exposed to.
Rebalancing is not glamorous, but it gets the job done. Investors should decide which asset classes to include in a portfolio and in what proportions so as to maximize returns for the level of risk one is willing to take on. Additionally, by following a rebalancing regime, investors may be less apt to dump positions during a downturn and still hold onto some assets that are up in a diversified portfolio.
Historical data also supports the case for rebalancing an investment portfolio. In a 2014 study on the “American Association of Individual Investors Journal,” Charles Rotblut created three different investment portfolios: One that was rebalanced each time allocations were 5% off from their target. A non-rebalanced portfolio. Lastly, a portfolio where investors dumped stocks each time the S&P 500 fell at least 20%. The author found that the rebalanced portfolio outperformed the other two and did so with less volatility than the non-rebalanced portfolio and about the same volatility as the sold off one.
“Although the goal of pulling out of the market was to stop the pain of the bear markets, over the last 26 years, an investor would have experienced the same level of volatility by simply sticking with stocks and rebalancing as necessitated,” Rotblut said.