- September 1, 2022: Vol. 34, Number 8

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Portfolio allocation: Raising the bar for rebalancing — even in volatile markets — may raise returns over the long run

by Jared Gross

When rebalancing adds value, it is equated with tactical skill; when it loses value, it is excused as strategic discipline. The opportunities for improving this process are apparent, but reconciling long-term investment strategy with short-term market movements is challenging.

Markets are currently experiencing a period of exceptional volatility, which will inevitably push asset allocations away from long-term strategic targets. The common response to this situation is to rebalance the portfolio back to target by selling assets that have relatively outperformed and buying those that have relatively underperformed the broader market. It feels like a safe assumption that selling recent “winners” and buying recent “losers” will add value over time, but investors should be careful. Placing confidence in the short-term mean reversion of asset class returns is little better than a coin flip. Simple mechanical rebalancing, unless structured correctly and applied narrowly, ha

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