Portfolio balancing may seem like a statistical exercise. But over the past 20 years, investors who made sure their portfolio allocations remained close to target could have fared better than those who took a laissez-faire approach.
Consider the results for two hypothetical portfolios allocated 60% to stocks and 40% to bonds on May 1, 1993, and set to mirror the performance of the S&P 500 (stocks) and the Barclays Aggregate (bonds). One of the hypothetical portfolios would have been rebalanced to 60/40 every time either asset class grew more than five percentage points above its target. The other portfolio would have had its allocations left unaltered regardless of market changes. At the end of April 2013, the rebalanced hypothetical reference portfolio would have produced stronger annualized returns (8.22% vs. 7.86%) and less volatility (a standard deviation of 9.24% vs. 10.63%).*
This chart illustrates the potential performance benefits of a rebalanced portfolio compared with a laissez-faire portfolio. It suggests that the benefits of re-balancing may be most apparent during times of significant market volatility and uncertainty. Each column in the chart represents the hypothetical difference in cumulative month-end net asset value between rebalanced and laissez-faire reference portfolios. Both hypothetical portfolios were initially valued at $100,000 and allocated 60% to stocks mirroring the total return of the S&P 500 and 40% to bonds mirroring the total return of the Barclays Aggregate bond index. The rebalanced portfolio was brought back to a 60%/40% allocation each month one of the asset classes exceeded its target allocation by five percentage points.*
Considerations for Creating a Rebalancing Program:
Portfolio re-balancing can be an important component of investment management. It is also a complex endeavor with many types of considerations to weigh. As your Morgan Stanley Financial Advisor, I can help you navigate among the many choices and implement a regular re-balancing strategy that suits your specific needs and circumstances.
*Sources: S&P Capital IQ; Barclays. Calculations based on month-end total return indexes covering the 20-year period ended April 30, 2013. Past performance does not assure future results. Investors cannot invest directly in any index. Index performance does not include any of the fees, commissions and taxes that might be incurred by actual investments. Asset allocation and rebalancing do not assure a profit or protect against a loss. There may be a potential tax implication when rebalancing. Please consult your tax advisor before implementing such a strategy.
Bruce Hemmings is a Financial Advisor and Senior Vice President with the Global Wealth Management Division of Morgan Stanley at Centerra. He can be reached at firstname.lastname@example.org or (970) 776-5501.