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Client Conversations 

Does Portfolio Rebalancing Work? Yes, Even in Bear Markets

Rebalancing, especially when stocks are undervalued, may be a prudent long-term strategy.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


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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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. 

 

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