portfolio rebalancing made simple matthew k. willms, president quant ix software, inc
TRANSCRIPT
Portfolio Rebalancing Made Simple
Matthew K. Willms, PresidentQUANT IX SOFTWARE, Inc.
www.investmentaccountmanager.com
What Is Rebalancing?The process of reallocating assets within a
portfolio.Getting your investments back in line with
your target allocation of stocks, bonds and short-term reserves.
Removing money from those investments that have performed well and reinvest into your portfolio underachievers.
Portfolio Rebalancing Made Simple
Why is rebalancing important?Asset allocation important determinant of
portfolio return.
Portfolio Rebalancing Made Simple
Portfolio allocation across multiple asset
classes helps to reduce risk while
improving portfolio returns.
Why is rebalancing important?Rebalancing can help control risk.
Portfolio Rebalancing Made Simple
• Over time, investment returns can lead to significant shift in your portfolio, increasing risk.
• Periodic rebalancing allows you to maintain target allocations, while reducing portfolio drift.
• Add bonds, reduce int’l stocks
Why is rebalancing important?Terminal account values of fixed income
components are higher.
Portfolio Rebalancing Made Simple
• Over longer time periods bonds and cash generate lower returns.
• Excess gains from other assets rebalanced into these lower return assets.
• create a sort of fixed-income ‘lockbox’ for liquidity, emergency needs. • ARB growth of $10,000: $468,929
• BH growth of $10,000: $364,835
Why is rebalancing important?Proper allocation can preserve / grow wealth
– periodic rebalancing is the key.
Portfolio Rebalancing Made Simple
Annually rebalanced portfolios had higher ending account value in 14 out of 20 twenty-year rolling periods than the buy-and-hold portfolio.
• source: Financial Planning 2/2009
5 Steps to accomplish rebalancingStep 1: Determine your asset
allocation targets What allocation of
stock/bond/cash is right for you?
Not sure? Review asset allocation of target-
date mutual funds geared towards individuals in your age range;
Web sites to complete questionnaires;
Morningstar, Vanguard, Fidelity;
Portfolio Rebalancing Made Simple
5 Steps to accomplish rebalancingStep 2: Determine
your current asset allocation
Organize investment statements;
Overlap of investments by type, sector, size in aggregate;
Drill down composition of fund holdings.
Portfolio Rebalancing Made Simple
5 Steps to accomplish rebalancingStep 3: Review your individual holdings
use research tools to review/analyze current holdings to spot early warnings signs
examine performance short and long term results contributed or detracted most to portfolio
performance;
consider tax consequences tax-loss selling rebalance in tax-sheltered accounts
Portfolio Rebalancing Made Simple
5 Steps to accomplish rebalancingStep 4: Implement your rebalancing plan
Identify where current allocations need trimming; Shift/rebalance money from those asset types that
have performed well and reinvest into your portfolio underachievers;
Continually review allocation changes to get back in line with your target allocation of stocks, bonds and short-term reserves.
Portfolio Rebalancing Made Simple
5 Steps to accomplish rebalancingStep 5: Make a habit to periodically rebalance
your portfolios!
Set a schedule; 1 or 2x per year
Year end rebalance with eye towards harvesting losses to offset gains elsewhere
Portfolio Rebalancing Made Simple
Summary... Portfolio Rebalancing... Helps reduce chances for disproportionate losses
if over concentrated in one asset class; Proper allocation is a cornerstone of good portfolio
management; Avoiding portfolio ‘drift’ is critical to your long-term
investment success; Rebalancing: helps investors to buy low and sell
high; Portfolio Rebalancing can grow/preserve wealth!
Portfolio Rebalancing Made Simple
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