The “right” rebalancing policy is likely to vary by investor return objectives, risk tolerance, sensitivity to turnover, and desire to manage implementation complexity.
Our research suggests that regular portfolio rebalancing is additive compared to a buy-and-hold strategy, and generates modest excess return while controlling active risk relative to a strategic benchmark.
Investors spend a considerable amount of time determining the appropriate asset allocationweights to apply to their portfolios, including consideration of risk tolerances. The purposeof having a rebalancing policy is to recapture the portfolio’s intended asset allocation aftera period of market movement and prevent a potentially undesirable outcome if no action istaken. Rebalancing is not done necessarily to maximize returns, but rather to produce a riskreturnoutcome that aligns with an investor’s long-term investment goals. There are a widevariety of rebalancing policies employed by investors, ranging from simple and straightforwardcalendar-based approaches to more complex methodologies based on market timing indicators.Throughout this piece we will examine some of the most common rebalancing policies andevaluate their impact on portfolio performance, various risk parameters, and turnover.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.