As you’ll see in the section related to COVID-19, organizations that rebalanced their portfolio in March, 2020 reported the higher returns. We view this as an important reminder that bringing discipline and structure to portfolio management will likely results in effective decisions.
Rebalancing involves making decisions when markets are volatile. When stocks are down, for example, it’s human nature to believe they are “falling,” which assumes there is further to go. Without a clear policy to drive action, it’s likely investors will miss the opportunity to buy lower. Rebalancing presents an opportunity to take advantage of market volatility by systematically taking profits from market segment that have risen in value and using the proceeds to buy in to market segments that have fallen.
In our opinion, any rebalancing policy is better than not having one at all. Our preference, however, is a policy that allows a certain degree of drift from a target. While asset allocations should be monitored regularly, rebalancing is only necessary when a portfolio has moved too far from its target. Otherwise, the risk profile of the portfolio remains intact and incurring transaction costs is unnecessary.
We don’t believe it’s possible for anyone to consistently and reliable time markets. Absent some extraordinary ability to see the future, RIA strongly encourages nonprofits of all sizes to maintain clear asset allocation targets, consider the rebalancing strategy that works best for them, formally outline the rebalancing guidelines in their investment policy, and stick with it. Let investing be simple.