Clients expected us to rebalance because we asked them to have that expectation. They knew that like good times, bad times don't last forever. In some cases, by sharing with them the mathematics I outlined, they could see that by buying they would get back to whole faster than sitting tight or worse, selling.
I think Lee summed it up well in her paper: "The primary motivation for rebalancing should not be the pursuit of higher returns, as returns are determined through the asset allocation, not through rebalancing. .... Rebalancing decisions should be driven by the need to maintain an allocation with a risk and return profile appropriate for each investor. The optimal rebalancing strategy will differ for each investor, depending on their unique sensitivities to deviations from the target allocation, transaction frequency, and tax costs."
Next month: Why what A and B actually are can be critical.
Dan Moisand, CFP has been featured as one of the 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 (321) 253-5400 or [email protected]