The right time to rebalance

As the year comes to a close, now’s the time to get your clients’ asset mixes back to where they’re supposed to be.

The markets have taken investors for quite a ride over the past three months — the S&P/TSX Composite Index is down about 7.5% since September 2014 — which means your clients’ asset allocation percentages are likely out of whack.

With that in mind, there’s one thing that should be on the top of every advisor’s 2015 to do list: rebalancing client portfolios.

Numerous studies have shown that annual rebalancing can boost returns by between 0.5 to 1 percentage points every year. Yet, it’s something a lot of investors fail to do.

“I can’t tell you how many people I’ve seen who can’t be bothered with rebalancing,” says Stephanie Holmes-Winton, a Dartmouth-based financial advisor and author of Spent: Your money mindset is the key to your financial freedom. “You can easily be out of balance if the market moves as violently as it has.”

In theory, rebalancing is simple. Sell an overperforming asset and use those funds to top up the underperforming one. If a 50/50 stock bond mix has become a 40/60 mix over the year, then buy and sell enough to get that original percentage back in line.

What makes it more difficult, though, is timing. Most advisors talk about rebalancing once a year, but Holmes-Winton thinks it should be done more often, especially in a wildly fluctuating market and if your client base is nearing retirement.

“If you’re really close to retirement and need to start taking assets out in six months for income, then you’ll want to make sure you’re rebalancing more frequently,” she says.

She suggests rebalancing at least twice a year. And, to make sure it actually happens, set regular rebalancing dates with the client.

Some advisors may want to rebalance even more frequently — or, depending on what research you believe, less. A recent MoneySense article looked at some of the studies around this and found that opinions around timing vary significantly.

Some studies suggest rebalancing every two years, in order to take advantage of market cycles. (If you sell your stocks in a bull market to top up your bond portfolio, for instance, you’ll lose out on those equity gains.)

Reports have also shown that quarterly rebalancing beats annual, while still other studies state that monthly rebalancing provides the best boost.

When it comes down to it, though, it should be about the original plan, says Holmes-Winton. If the asset mix gets too far away from the financial plan, then it’s likely that your client’s risk profile will be out of line.

Holmes-Winton is not opposed to “rebalancing as you go,” which would involve more frequent asset shifts than many advisors and clients would be used to.

The reason she likes to rebalance often is that it takes the emotions out of investing. People aren’t going to overreact if they know that they’re always buying and selling to keep their portfolio’s mix in line.

“It has nothing to do with market timing,” she says. “Human behaviour and the stock market don’t usually mix so well, so this keeps emotions out of it.”

It’s anyone’s guess as to where the market will end up this year, but one thing’s for certain — your clients’ asset mixes aren’t where they were at the beginning of 2014.

Get people into the office early in the year, says Holmes-Winton, and get their portfolios back on track.