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Rebalancing Strategies for Volatile Markets

Explore the effectiveness of portfolio rebalancing in volatile markets over long versus short timeframes and its impact on asset allocation shifts. Understand the pros and cons, costs, and strategies to optimize your investment approach. Consider key factors before rebalancing to best capture market movements.

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Rebalancing Strategies for Volatile Markets

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  1. Rebalancing – What works in Volatile Markets?December 3, 2009 Alan Bergin, CFALarry Thompson & Associates

  2. Assumptions • Portfolio with 60% in MSCI World and 40% in the Barclay’s Aggregate • One portfolio is rebalanced annually • Other portfolio is not rebalanced at all

  3. Does Rebalancing work? • After almost 35 years, rebalanced portfolio worth more

  4. Cumulative Market Value Difference (Rebalanced minus non-rebalanced) • Rebalancing is not always the best solution

  5. Asset Allocation shifts in non-rebalanced portfolio

  6. What About 2007-2009 • Rebalanced portfolio worth more • It looked much worse through March

  7. Cumulative Market Value Difference (Rebalanced minus non-rebalanced) • If not for strong 2009 recovery, rebalanced portfolios would be far behind

  8. Asset Allocation shifts in non-rebalanced portfolio

  9. Conclusion • Rebalancing appears to work over long time periods • Over short periods, it has mixed results • In volatile markets, review asset allocation strategy before rebalancing • Issues to consider: • Have a rebalancing plan – do not market time • Rebalancing frequency • Range based or date based? • What is the cost of the rebalancing? • Range based rebalancing appears to offer best trade-off in costs and potential to capture market movements

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