In our professional judgment, anything investors can do to remove emotions and instill discipline to the investment process will likely improve decision-making.

We view rebalancing as an ideal way to maintain a portfolio’s risk profile.  Organizations that lack clear asset allocation targets have nothing to rebalance to.  Their portfolio allocation will drift as does the market until some judgment to change course is made.  On the other hand, organizations with a formal target asset allocation must decide the circumstances that will trigger a move back to the targets.  A formal rebalancing policy enables these circumstances to be established in advance and free from the noise of the market.

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, RWM 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.

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