A bear market can sometimes throw your finely tuned asset-allocation mix out of whack. As stocks lag, your bond portfolio may start to outperform. Next thing you know, your “ideal” 70%/30% asset mix might be drifting toward a 60%/40% or even a 50%/50% split, and your actual mix no longer matches your risk profile.
You should consider adopting a portfolio rebalancing strategy—even during down markets when it’s tempting to let your “winners” keep growing while your “losers” are taking their lumps. That’s because rebalancing helps you “buy low” and “sell high”—an investing adage that’s easy to say and hard to do.
The chart below illustrates hypothetical outcomes for three different investment strategies.
Bottom line: Rebalancing is an important investment discipline, whether you do it annually or use a rules-based system to rebalance only when stocks decline by a certain amount.
Doing the Math: Buy and Hold vs. Two Different Rebalancing Strategies
| Buy and Hold (No Rebalancing) | Portfolio Rebalanced to 70%/30% Annually | Portfolio Rebalanced to 70%/30% Only After 20% Drop* | |||||||
| Date | Stocks % |
Bonds % |
Investment Value | Stocks % |
Bonds % |
Investment Value | Stocks % |
Bonds % |
Investment Value |
| 1/1/2000 | 70 | 30 | $100,000 | 70 | 30 | $100,000 | 70 | 30 | $100,000 |
| 12/29/2000 | 66 | 34 | $97,115 | 66 | 34 | $97,115 | 66 | 34 | $97,115 |
| 12/31/2001 | 61 | 39 | $92,380 | 65 | 35 | $91,495 | 68 | 32 | $91,871 |
| 12/31/2002 | 52 | 48 | $83,713 | 62 | 38 | $80,155 | 68 | 32 | $80,410 |
| 12/31/2003 | 57 | 43 | $97,884 | 74 | 26 | $97,236 | 73 | 27 | $97,176 |
| 12/31/2004 | 59 | 41 | $105,809 | 71 | 29 | $105,909 | 74 | 26 | $106,005 |
| 12/30/2005 | 59 | 41 | $109,926 | 71 | 29 | $110,322 | 74 | 26 | $110,521 |
| 12/29/2006 | 62 | 38 | $122,182 | 72 | 28 | $123,953 | 76 | 24 | $124,710 |
| 12/31/2007 | 62 | 38 | $129,580 | 70 | 30 | $131,311 | 76 | 24 | $131,999 |
| 12/31/2008 | 49 | 51 | $102,637 | 58 | 42 | $99,368 | 63 | 37 | $97,296 |
| 12/31/2009 | 53 | 47 | $119,056 | 74 | 26 | $119,544 | 77 | 23 | $120,314 |
| 12/31/2010 | 55 | 45 | $132,266 | 72 | 28 | $134,495 | 78 | 22 | $136,086 |
| 12/30/2011 | 54 | 46 | $138,443 | 69 | 31 | $139,647 | 77 | 23 | $140,644 |
| 12/31/2012 | 57 | 43 | $153,092 | 72 | 28 | $157,057 | 79 | 21 | $159,416 |
| 12/31/2013 | 64 | 36 | $179,838 | 76 | 24 | $191,711 | 84 | 16 | $199,682 |
| 12/31/2014 | 65 | 35 | $199,434 | 71 | 29 | $213,511 | 85 | 15 | $224,516 |
| 12/31/2015 | 66 | 34 | $201,619 | 70 | 30 | $215,932 | 85 | 15 | $227,337 |
| 12/30/2016 | 68 | 32 | $219,281 | 72 | 28 | $235,724 | 86 | 14 | $251,316 |
| 12/29/2017 | 71 | 29 | $254,147 | 73 | 27 | $274,253 | 88 | 12 | $299,709 |
| 12/31/2018 | 70 | 30 | $246,241 | 69 | 31 | $265,845 | 87 | 13 | $288,180 |
| 12/31/2019 | 74 | 26 | $307,006 | 74 | 26 | $331,391 | 89 | 11 | $370,572 |
| 4/30/2020 | 71 | 29 | $289,909 | 67 | 33 | $314,791 | 73 | 27 | $334,308 |
* This hypothetical investor rebalanced the portfolio after 20% equity drops on 3/12/01, 7/10/02, 7/15/08, 2/27/09, and 3/12/20.
Past performance does not guarantee future results. The chart above is for illustrative purposes only. Market performance data is based on daily changes in the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index. Indices are unmanaged and not available for direct investment. Source: Bloomberg Index Services Limited.
Talk to your financial advisor about the benefits of a portfolio rebalancing strategy.
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Fred Reish The final regulation requires that, in order to satisfy the dual duties of prudence and loyalty, plan fiduciaries must base their investment decisions only on pecuniary factors. |
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The SECURE ACT: New Law, New Opportunities
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) is the most meaningful retirement legislation to take effect since the Pension Reform Act of 2006. |
Important risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall.
The S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.
The Bloomberg Barclays US Aggregate Bond Index is composed of securities from the Bloomberg Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
CCWP084 217777