Volatility Underscores the Importance of Rebalancing and Tax-Loss Harvesting
A double-digit selloff is hard to stomach, particularly when it coincides with a global pandemic that upends society. However, it does create opportunity.
Right now, rebalancing and tax-loss harvesting are two topics that should be at the forefront of every portfolio construction conversation.
A double-digit selloff is hard to stomach, particularly when it coincides with a global pandemic that upends society. However, it does create an opportunity to examine best practices for portfolio construction, especially since volatility remains high, given that the S&P® 500 Index has registered the most sessions since 1933 with a plus-or-minus 1% daily return over a 30-day period.1
Rebalancing and tax-loss harvesting are two topics, therefore, that should be at the forefront of every portfolio construction conversation.
Rebalancing matters, more than ever
The timing of portfolio rebalancing can have a dramatic impact on a portfolio’s period-based and cumulative return figures. Those return differences result from “timing luck,”2 something that’s very much on display right now, as volatility has spiked and asset class dispersion has become idiosyncratically elevated.
To illustrate this point, I calculated returns for a standard 60/40 portfolio rebalanced monthly and quarterly – but with different intervals, resulting in four different quarterly periods3 – as well as the returns for a naively constructed equal-weighted sector portfolio with the same rebalancing frameworks. The chart below plots the dispersion between the five portfolios that were rebalanced differently, but similarly constructed in terms of asset mix, for March, year-to-date and over the past one-year period.