You Probably Need to Rebalance

To
test
the
weightings,
I
started
with
a
simple
portfolio
combining
60%
in
equity
funds
and
40%
in
bond
funds.
I
allocated
one
third
of
the
equity
weighting
to
foreign
equity
and
split
the
domestic
portion
between
value
and
growth
funds.
Over
each
period,
I
assumed
investors
took
a
hands-off
approach
and
simply
held
the
underlying
assets
without
making
any
changes
in
the
interim.
In
all
three
cases,
the
portfolio
weightings
would
have
drifted
away
from
target
levels,
especially
with
respect
to
the
mix
of
stocks
and
bonds
but
also
when
it
comes
to
value
and
growth.

Five
Years
Since
Last
Rebalancing

If
it’s
been
several
years
since
your
last
portfolio
rebalancing,
your
portfolio
is
probably
significantly
out
of
balance.

Source:
Morningstar
Direct.
Data
as
of
Nov.
30,
2023

Even
after
the
bear
market
in
2022,
equities
have
still
outpaced
bonds
by
a
decent
margin
over
the
trailing
five-year
period.
As
a
result,
my
test
portfolio’s
overall
equity
exposure
expanded
from
60%
at
the
beginning
of
the
period
to
70.1%
by
the
end.

That
change
would
also
have
a
significant
impact
on
a
portfolio’s
risk
profile.
To
get
things
back
in
balance,
it
makes
sense
to
reallocate
assets
from
stocks
to
bonds.

Five
Years
Since
Last
Rebalancing:
Overall
Asset
Mix
(%
of
Total)

Source:
Morningstar
Direct.
Data
as
of
November
30,
2023

Because
US
equities
outperformed
their
non-US
counterparts
for
most
of
the
five-year
period,
the
mix
between
US
and
non-US
equities
is
also
probably
ready
for
some
adjustments.
By
the
end
of
the
five-year
period,
US
stocks
would
have
risen
to
51.6%
of
the
overall
portfolio –
significantly
above
the
original
level.

The
mix
between
value
and
growth
stocks
would
be
significantly
out
of
whack
too,
with
growth
stocks
accounting
for
30.1%
of
total
assets,
up
from
20%
at
the
beginning
of
the
period.
That
means
growth
companies
are
a
logical
place
to
cut
back;
those
assets
can
then
be
redeployed
to
shore
up
the
fixed-income
weighting.

Three
Years
Since
Last
Rebalancing:
Fund
Weightings

If
it’s
been
about
three
years
since
your
last
overhaul,
it’s
probably
time
for
some
tweaks.

Source:
Morningstar
Direct.
Data
as
of
November
30,
2023

In
this
scenario,
equities
would
have
grown
to
about
67.4%
of
total
assets,
while
bonds
would
be
more
than
seven
percentage
points
below
the
target
level.

US
equities
would
have
drifted
up
to
47.7%
of
assets,
compared
with
40%
in
the
original
portfolio.
The
mix
between
growth
and
value
won’t
have
changed
dramatically,
as
value
stocks
held
up
much
better
than
growth
during
the
2022
bear
market,
but
growth
issues
returned
to
the
fore
in
2023.
Both
value
and
growth
would
have
been
overweight
compared
with
their
target
levels,
making
them
both
logical
candidates
to
trim
back
and
redeploy
the
proceeds
into
bond
funds.

Three
Years
Since
Last
Rebalancing:
Overall
Asset
Mix
(%
of
Total)

One
Year
Since
Last
Rebalancing:
Fund
Weightings

If
it’s
been
a
year
since
you
last
rebalanced,
your
portfolio
probably
doesn’t
need
another.

Source:
Morningstar
Direct.
Data
as
of
Nov.
30,
2023.

Because
US
equities
gained
about
20%
for
the
year-to-date
period
through
November
30,
2023
(bond
returns
were
much
lower)
the
portfolio’s
overall
equity
exposure
would
have
increased
to
about
63.3%
of
assets,
up
from
60%
previously.

To
keep
things
in
balance,
it
makes
sense
to
prune
back
equity
exposure
(especially
from
the
growth
side
of
the
portfolio)
and
redeploy
some
assets
back
into
bonds.
Because
US
stocks
have
outperformed
international
issues
by
a
wide
margin
over
the
past
year,
they
would
now
consume
about
42%
of
assets,
up
from
40%
originally.
Growth
stocks,
meanwhile,
would
also
have
drifted
over
the
original
target.

One
Year
Since
Last
Rebalancing:
Overall
Asset
Mix
(%
of
Total)

How
to
Rebalance

If
you
suspect
it
might
be
time
to
rebalance,
the
best
way
to
start
is
to
understand
your
portfolio’s
current
asset
mix.
For
Morningstar
Investor
subscribers,
our
portfolio
tool
can
provide
a
quick
view
of
the
combined
asset
exposure
for
your
underlying
holdings.
If
you
find
certain
areas
have
drifted
away
from
target
levels,
some
remodelling
might
help.

Conclusion

It’s
important
to
note
portfolio
rebalancing
is
mainly
a
tool
for
controlling
risk –
not
necessarily
for
improving
returns.
Broad
market
trends
can
often
persist
for
multiple
years,
meaning
simply
letting
a
portfolio’s
winners
ride
can
pay
off
at
times.
For
example,
US-based
stocks
have
outperformed
their
non-US
counterparts
by
a
wide
margin
over
eight
of
the
past
10
calendar
years
(including
the
first
11
months
of
2023).

As
a
result,
selling
domestic
winners
to
maintain
a
given
weighting
in
international
stocks
has
not
led
to
better
returns.
That
said,
reversion
to
the
mean
is
a
powerful
force,
and
even
long-lived
trends
don’t
last
forever.
One
of
the
virtues
of
rebalancing
is
to
avoid
getting
caught
flat-footed
when
market
trends
eventually
reverse
course.

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