How Often Should a Portfolio be Rebalanced?
By PAIP Canada staff
Industry professionals know the answer like the back of their hand.
“At least annually, or when a major life event occurs” is what comes to mind, but that may not be correct. If the question was about updating Know-Your-Client (KYC) information, then the answer is largely correct.
When it comes to asset allocation, there’s no shortage of opinions. For those with a managed account or a fund of funds, then technology and/or the professional money manager takes care of it when needed. But not everyone falls into that camp.
Instead, many investors either hold a portfolio of mutual funds, exchange-traded funds (ETFs), individual securities, or any combination of the above, and often need to handle their own rebalancing… But not so fast!
After more than a decade of extremely low interest rates, many investors have not only seen their asset allocations weighted more towards equities, at the expense of fixed-income investments, but they’ve also aged.
Prior to the great recession of 2008 and 2009, corporate grade fixed income offered investors a reasonable rate of return and it made sense to hold bonds. In most cases, the return from these instruments was greater than inflation. Since 2009 however, times have changed. The return offered by corporate grade bonds declined, and in many cases, didn’t even cover the cost of inflation. The result: investors shifted their asset allocation to equities, or potentially to fixed-income alternatives with a higher amount of risk.
As interest rates have finally started to climb, it may finally be time to reevaluate one’s feelings towards risk. With higher interest rates, companies face a higher cost of capital, which in turn increases the risk of investing in equities.
In tandem, bonds also become more attractive as their returns are expected to beat the rate of inflation. In addition, should interest rates decrease, then bond owners also have the opportunity to realize a capital gain from the bond they’re holding. The longer the term of the bond, the better.
Although different standards exist vis-à-vis portfolio rebalancing, the minimum standard is at least once per year, if not more often. Whenever the markets have a major move, or a cash inflow (or outflow) occurs, then one’s asset allocation can be reconsidered.
Since interest rates have moved substantially over the past year, why not give one’s asset allocation another look?