Rebalancing Your Portfolio

One key area of value that professional wealth advisors add is to set out a plan for your financial future. Assessing your goals and establishing a plan around those goals is extremely important. Managing your assets to ensure that they stick to those guidelines is important. Siena Wealth Advisors develops an Investment Policy Statement (IPS) individualized to each client for this very reason. The IPS outlines your goals and matches those goals to your personal need, ability and willingness to take risk. The cornerstone of this process is rebalancing. By rebalancing your portfolio back to the stated targets, it ensures your keeping your level of desired risk and return to there appropriate levels which will reduce risk and maximize returns. As the markets and various assets classes have gone up or down over time, many investors portfolios are no longer in line with there original plan. Having had a chance to review many statements of prospective clients I often see where portfolios get off track. This is often the case in employer 401K plans or Rollover IRAs that investors are managing themselves. Recently, I reviewed a portfolio where the investor had been putting contributions to an employer 401k in what they believed was a 50/50 portfolio. Upon review of the portfolio it was actually 70 percent equities and 30 percent fixed income. Since the plan did not offer any portfolios with auto-balancing features and since the equity side of the market has been growing since 2008, the equity portion of the portfolio had grown faster than the fixed income portion. The graph below shows how portfolios can go astray if not rebalanced at least semi annually. This graph is assuming a 60/40 portfolio.


This chart shows that rebalancing your portfolio not only keeps your portfolio on track with stated risk goals but by rebalancing at least annually the same 60/40 portfolio actually increases returns. How so? Rebalancing counter acts the common investment mistake referred to as "recency" as defined by Larry Swedroe here. Recency is the tendency to extrapolate recent returns far into the future, causing investors to buy high and sell low. Rebalancing, as required by an IPS, requires selling some of a portfolio's recent winners and utilizing those proceeds to buy more of recent underperformers. The result? Investors buy low, sell high and keep their portfolio's risk/return profile in line with their goals.


Siena Wealth Advisors creates Investment Policy Statements (IPS) for all clients and we continually monitor our clients' portfolios for any deviation from their stated goals in our IPS. In addition, Siena looks for opportunities to take advantage of capital losses and capital gains to minimize tax consequences of rebalancing transactions. This is extremely important in taxable accountings.

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W. Joseph Irish earned a bachelor’s degree in business administration from Western Michigan University with a major in accounting and is a Certified Public Accountant (CPA) and holds a Personal Financial Specialist (PFS) designation from the American Institute of Certified Public Accountants (AICPA). Prior to joining Siena, Joe spent 15 years as Chief Financial Officer and 9 years as shareholder at a successful logistics firm that specializes in rail transportation logistics.