Editor's note: The Retirement Advisor is a new column that will appear from time to time in Financial Advisor magazine.

"Conservative," "aggressive," "active," "passive," "strategic," "technical." These are all common words that mean different things to different people.

So is the idea of rebalancing. I've received a number of e-mails suggesting that portfolio rebalancing, and the premium one gets from it, is simply another name for market timing. Of course, even if it were, timing can make a difference. Buying at the bottom or selling at the top certainly beats missing them both. But in my view, rebalancing is not market timing. Whether you agree largely depends on your definition of the latter.

Market timing can be hard to define, but is easier to identify if we take an extreme example of it. A strategy that attempts to outperform the market by moving 100% of a portfolio in or out, anticipating a near-term change in the market's direction, would qualify.

The first element of this scenario to consider is the percentage of the portfolio going in or out of the market. The larger the percentage, the more likely people see it as market timing. But in rebalancing, the percentage moving is relatively modest.
Consider a portfolio that targets a 50/50 split between investment A and investment B, with $100,000 in each. Investment A stays flat while B loses 40%. The total is $160,000 (A=$100,000 and B=$60,000). To rebalance, $20,000 is moved from A to B so that each now has $80,000. Even after waiting for a 40% drop or a 62.5%/37.5% mix, rebalancing to the original target requires only 12½% of the portfolio to move from A to B. Rebalancing at a point where B has declined 20% results in a $10,000 transaction, or a move of less than 5.6% of the portfolio ($10,000/$180,000).

Another facet of market timing is its short-term nature. Timers want in before a market rises and out before a fall. As volatile as markets can be, this can lead to frequent trading. But this is probably the weakest aspect of market timing. Volatile markets can also trigger a series of rebalancing transactions in a short time frame.

The third element is intent, probably the greatest hallmark of market timing. Market timers often take pride that they are taking advantage of the very volatility that can drive others nuts. Skeptics would say that strategic asset allocators also typically take pride that they are taking advantage of market volatility through rebalancing.

But the difference between the intent of the market timer and rebalancer is significant. The former wants to eliminate the risks of exposure to a market by being out before a decline. The rebalancer merely wants to lower the risks by reducing, not eliminating, the exposure to a market when the portfolio has more than desired. From time to time, market timing seeks zero risk from a market while rebalancing typically would not reduce exposure to zero.

Of course, if we go back to our simple 50-50 portfolio, when we rebalance, that $20,000 drops its exposure to A to zero and is exposed 100% to B. In fact, total exposure of the portfolio to B was increased by 33%, implying a strong conviction that B will rebound. Some may get bogged down by this: They'll say this is not timing the entire portfolio, but it is timing the $20,000. I disagree. The motivation behind the transaction is not driven by anticipation of a rebound in B or a drop in A soon after the trades are executed.

Furthermore, if you take the position that selling out of A completely and putting $20,000 into B is market timing, that means just about any transaction would be. If Bill Gates sold a single share of Microsoft, no one would say he was engaging in market timing, even though he was reducing his exposure to Microsoft by the value of that share. It may be the case for an all-in or all-out transaction with the whole portfolio. But selling one share is clearly not market timing when the entire portfolio is taken into account. The sale implies a different intent.

My grandfather used to say that we judge ourselves by our intent but everyone else judges us by our actions. We can't know for sure, but it is highly unlikely that a sale of any small number of Microsoft shares by Mr. Gates would be intended to "beat the market."

A rebalancer sells A to buy B because the portfolio goal is to maintain an even split between A and B on a long-term basis. The trigger is not a specific forecast of market behavior.

The two most common rebalancing triggers are the calendar (the portfolio is rebalanced at specified intervals, often quarterly or annually) and investor thresholds, when an exposure to a holding exceeds or drops below a target percentage. Take a holding with a 20% target in a portfolio and apply a 30% "tolerance band." Rebalancing would dictate a buy when the position drops to 14% and a sell when it represents 26% of the portfolio. A 20% band triggers trading at 16% and 24%.

Sometimes it is easier to see the differences in intent when one takes a view from a much higher vantage point than the transaction level. For instance, if we go all the way up to the practice level rather than just the portfolio level, we get clues about the portfolio manager's intent.

A practice that times the market will make wholesale changes across the board regardless of differences in client goals or how long clients have been with the firm. A timing operation will often pull everybody out or put everybody in based on the portfolio manager's forecast. If his or her forecast changes shortly after a new client's portfolio has been implemented, the transactions are likely executed based on that forecast.

But if he's simply rebalancing, a portfolio manager only changes the portfolios whose allocations are out of balance or whose trigger has come on the calendar. It is conceivable that while selling some securities to rebalance in one client's portfolios, a manager could also be buying those same securities in order to take up a position for a new client or to take up a new position after a cash inflow.

Client portfolios can find themselves out of balance because of cash flows in or out of various accounts. Those transactions don't strike me as market timing.

When we look at the extreme ends of the spectrum-the frequency of the trades and the motivation-we are more likely to get a consensus about what is and what isn't market timing. Or what is active versus passive or strategic versus tactical, for that matter. In between the extremes, however, there is plenty of room for debate.

I sometimes chuckle when I see people get wound up passionately advocating for a more active or less active approach. Empirically, there is little to debate. The data supports the simple math. In the aggregate, the result of all the activity is negative because of costs. Some who are active will outperform. But over time, fewer and fewer outperform by less and less.
On a very important level, none of that matters.

You can try to identify tomorrow's winners or you can play both sides of the fence. You can call your approach passive, active, strategic, tactical or whatever you like. Regardless of the approach or what label you put on it, you will sometimes look particularly smart and other times rather dumb. Either way, managing clients' expectations and their reactions to personal, family, market, economic and political events will probably be a bigger influence than trading activity on the net result.

Dan Moisand, CFP, has been featured as one of America's top independent financial advisors by most leading financial advisor publications. He has spoken to advisor groups on five continents on topics such as managing investments and navigating tax complexities for retirees; retirement readiness; and most topics relating to the development of the financial planning profession.  He practices in Melbourne, Fla. You can reach him at [email protected].