Why and How You Should be Rebalancing


Every long term investor should rebalance their portfolio at least once a year.

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Rebalancing is when you “reset” your portfolio to its target allocation weights. In other words, you sell positions that have performed well (and therefore have grown) and buy more in the underperforming areas. Sell the winners, buy the losers.

That sounds counterintuitive, and it’s sometimes difficult for investors to execute-– but it’s also essential for long-term success.

Rebalancing also gives you the opportunity to consider two other questions: (a) are your allocation weights still suitable for your goals and risk tolerance? and (b) are the assets in each class the best ones available, or is it time for some housecleaning? This article will focus on this second question through a fictitious couple, the Evanstons, who are about to go through their annual rebalancing.

Meet John and Claire Evanston

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John and Claire are in their late 30s and are married with three young children. Their goals include saving for their children’s future educational expenses and building wealth for retirement. They have built and maintained a well-diversified portfolio and they rebalance on an annual basis.

As they rebalance this year, they decide it would be a good idea to look at the performance of the biggest assets they hold, and are particularly concerned about two assets: global equities and U.S. large cap growth equities.

The Evanstons know that international equities have been affected by the ongoing European crisis and that growth stocks have been especially volatile. They want to be sure they have the best possible exposure to these asset classes based on their goals and risk tolerance.

Here are the three funds that are the top choices for the Evanstons, according to our assessment that best meet their needs in these two asset classes:

John  and Claire Evanston: Top Three Diversified Global & International Equity Funds

These are from a pool of 953 similar funds. Funds with less than 10 years of performance history and special-purpose funds (e.g. for retirement plans) are excluded.

The Evanstons are mostly interested in long-term performance, so they pay particular attention to the five and 10-year performance numbers. They see this as a measure of consistent performance over time.

They also like the lower-than-average standard deviation for Artisan, the No.1 fund. Standard deviation is a measure of investment risk.

Finally, they don’t want to pay too much in fees, but they know that the fee levels shown here is representative of active funds in the global & international category. The Artisan fund is neither the cheapest nor the most expensive-– but it appears to deliver the results. John and Claire decide to add this fund to their portfolio.

John and Claire Evanston: Top Three Large Cap Growth Funds

These are from a pool of 900 similar funds.

It’s a similar story for the large cap growth funds. John and Claire are looking for good performance over long time periods, lower-than-average risk and reasonable expenses.

The number one fund shown here, the Amana fund, meets these criteria. It features a low standard deviation, a strong 10-year average annual return and an expense ratio somewhat below the average for large cap active funds. The Evanstons choose the Amana fund for their post-rebalancing large cap growth allocation.

It’s important to pay close attention to performance in the areas that matter most to you – whether that’s returns, risk, management team tenure, or fees. Do this whether you’re choosing funds for long-term investment goals or allocating a small percentage of your portfolio for intermediate tactical plays. Keep in mind that generic rankings won’t give you insights into how fund performance relates to your unique investment needs.

Jemstep Inc. is a free online investment guidance and management service that helps individual investors make better investment decisions and achieve their financial goals faster. Jemstep’s investment evaluations, based on patented technology and objective market data, are unbiased and transparent. Jemstep does not accept paid listings or sponsorships that influence its fund rankings in any way, nor does it factor subjective user reviews into the guidance it provides. A privately owned company with headquarters in the heart of Silicon Valley, Jemstep is a registered investment advisor under the rules and regulations of the U.S. Securities and Exchange Commission. To learn more, please visit www.jemstep.com.