Rebalanced Portfolios in Up and Down Markets

November 15, 2011

As we recently reminded subscribers, portfolio rebalancing – adjusting portfolio holdings to maintain a given allocation—is an important investor tool. In the November issue and on Forbes, we explained that not only does rebalancing help investors keep their portfolio’s risk level in check, it also encourages them to sell high and buy low.

That’s not all: over the 25 years ending December 31, 2010, a balanced portfolio of stocks and bonds that was rebalanced annually produced higher returns than a balanced portfolio that was not rebalanced.  During this 25 year period the rebalanced portfolio also held up better in down markets than the portfolio that wasn’t rebalanced.

But the trade-off was that in up markets the rebalanced portfolio gained almost as much as the un-rebalanced portfolio.  As the table below details, the rebalanced portfolio participated in a majority of the upside when stocks were on the rise.

This was a pretty consistent pattern of trade-off during the much of this period:  When the market went down, investors would have been better off had they rebalanced each year.  When the market rose, investors would not have profited as much, but they would have given up less on the upside than they would have lost on the downside.

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Stephen Edelstein November 30, 2011 at 6:23 am

What percentage allocations, which funds?

noloadfundx November 30, 2011 at 9:56 am

Both portfolios began with a 60/40 mix of stocks and bonds, using the S&P 500 Index for stocks and the Barclays Aggregate Bond Index for bonds.

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