The results are notable but not enough to change our stance that it is pre-mature to make aggressive rebalancing a standing policy for all clients. The sample size here is too small, obviously, but there are other reasons for our hesitation. First, we did not examine the issue of when to return to the original target allocation, so we don’t have a specific policy on that issue.
Second, are the behavioral issues that the technique can create. The primary one discussed in the paper is how hard it would be for most people to execute an aggressive rebalancing in the face of a growling bear. Given only one client opted to make an aggressive shift and only did it in a small account, we think our concern there was validated.
One sure benefit of rebalancing to financial planning is it keeps a portfolio’s structure in line with its targeted mix of investments based on client goals. The other behavioral issue we were concerned about but did not write about concerns how the technique could pull a client from a prudent proven approach toward a more speculative mind set.
Our aggressive rebalancer recognized that the run up in stock prices came sooner and faster than he thought and was unlikely to continue unabated. His first question after rebounding was “Should we go to cash?” Our normally moderate client was entertaining the idea of market timing. Some of that could have been because the aggressive rebalancing was done in his Roth IRA, which represented a small portion of his total assets, but the line of thinking is consistent with what we see with speculations generally. When a speculation pays off, it is tempting to continue speculating.
Rebalancing should not be a form of market timing or speculation, nor be presented as such. It is an effective way of keeping risk exposures in line with those desired for goal achievement and provides a mechanism for the patient to exercise discipline.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].