As I’ve often written and taught, there is a science to investing and it’s processes. “Science” requires theories and studies both to prove and disprove – in this case, investment strategies and concepts.
One of the more important seminal studies – which was repeated and confirmed the findings, was what was the most important determinant in the success of investment portfolios. This was the famous Brinson, Hood and Beebower one (repeated) that provided the answer to that question. It was the asset allocation strategy which was responsible for 94% of a portfolios success. In other words, how much you allocated to stocks versus bonds, how much large company U.S. versus foreign; large companies and small, value and growth stocks (these are all “asset classes”).
Now this part of the study is both critical and important because most investors only pay attention to two strategies. Stock selection (attempts to pick the “best” stocks) and market timing (is this a good or bad time to be in or out of the market) contributed 6% -- all NEGATIVE, meaning asset allocation is responsible for 100% of the positive return of a portfolio. This leads to the topic of this communication.
When the market feels like a rollercoaster, it’s easy to want off the ride. But for investors with a long-term vision and dreams to achieve, staying the course can be critical to achieving their goals. At the nucleus of a prudent and disciplined investing strategy lies a powerful principle: rebalancing.
What Is Rebalancing?
Rebalancing is the disciplined process of realigning the weightings of a portfolio back to its original or intended allocation. As markets rise and fall, your investment allocations can drift away from your target – exposing you to more risk than desired.
Imagine a portfolio comprised of 50% fixed income and 50% stocks. If stocks surge, you might find yourself with 60% equities and only 40% fixed income (bonds/cash) – more aggressive and riskier than your intended level of risk. Rebalancing would bring you back to your original target allocations (in this case 50/50), helping to preserve your long-term strategy and manage your risk more effectively. Not rebalancing is effectively abandoning your strategy and allowing the ebbs and flows of the market to reallocate your portfolio for you.
Why Don’t More Investors Rebalance?
While the concept sounds simple, human nature often works against it.
“The investor’s chief problem — and even his worst enemy — is likely to be himself.”
– Benjamin Graham (the father of modern security analysis and Warren Buffet’s mentor)
It’s easy to say, hard to do! Many investors tend to do the opposite of rebalancing. They chase what’s performing well and flee from what isn’t – buying high and selling low. It may feel safe, but it can be potentially self-destructive. This behavior is often rooted in cognitive and emotional biases. According to behavioral finance expert Tim Parker, “For most people, it is impossible to be unbiased in investment decision-making.” Fear, overconfidence, loss aversion — all can distort sound judgment and sabotage a long-term plan.
Rebalancing Requires More Than Willpower
Rebalancing is not about guesswork or gut feelings — it requires discipline, data, and robust systems. We leverage complex algorithms designed to integrate both empirically tested academic investing research and insights from human behavior science. This isn’t just about making trades. It’s about realigning your portfolio to help preserve your asset class allocations according to YOUR acceptable level of risk, reinforcing your financial strategy instead of reacting to market noise.
Why You Need a Coach to Stay the Course
Most people can’t do this alone. Rebalancing consistently — and prudently — over a lifetime requires more than knowledge. It takes courage, patience, and accountability. That’s why a committed investor coach can be essential to sticking to a prudent investing strategy over a lifetime (not unlike a physician helping you to stay committed to a well thought out plan of health). Effective coaching can provide ongoing education, structure, and support — helping you hold firm in the face of market and even global volatility and make choices aligned with your long-term vision and strategy.
Volatility is inevitable. But panic is not. Rebalancing is the calm, disciplined and calculated response that can help keep you aligned with your long-term goals.
What you need to know to rebalance?
If you’re unsure whether your portfolio still reflects your goals, and this requires some essential knowledge on your part, such as: what is the specific, “measured” level of risk in your portfolio, how much could your portfolio decline in any one year or multiple years, what is the expected, long-term rate of return for your portfolio and where does your portfolio fall on the Markowitz “efficient frontier?” If you don’t know or never knew or had it explained to you, then you’re probably not rebalancing and keeping your allocation in balance!