Financial Opinion and Insights

Is Rebalancing Your Portfolio Always Smart?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

That’s what we’re taught!  Financial advisors, including yours truly, have been promoting the idea for years!  But, does is it always the best thing to do?

Those of us in the investment world are constantly telling people that past performance is not necessarily an indicator of the future… and you can’t assume historical patterns will continue.  This is because of the arbitrage principle:  If investment prices did follow a predictable pattern, smart investors will arbitrage that pattern away.

But, in the case of rebalancing, does maintaining your portfolio allocations actually help or hurt?

It depends.

For example, what if your measure of risk is experiencing inadequate cash flows in ten or twenty years?  And, what if you control that risk by holding part of your portfolio in 30-year Treasury bonds to provide a safety net?

If you do your periodic rebalancing, you will likely not maintain your risk hedge; in fact, you’ll likely destroy it.   Let’s say you start out with 50% in stocks for long term growth and 50% in Treasury bonds to provide your income safety net.  Suppose the market drops 20%.  Rebalancing would mean you’d be selling some of your Treasury bonds, your income safety net.   Here, rebalancing could be viewed as short-sighted.

For most investors, risk is a long-term, not a short-term, concern.  Short-term volatility is a component of risk, to be sure; but, too much emphasis on it can result in taking your eye off the ball from a long-term risk control strategy such as, for example, one which focuses on protecting income or hedging inflation.

Maybe `one size fits all’ advice isn’t the best, after all.  Before you can implement a prudent strategy, you have to have a plan.  And, the best plans always begin with an analysis of who you are financially – and where you want to go.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.