The Wisdom of Rebalancing | Moneta

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“Sell my U.S. Treasury bond and buy stocks and real estate… Are you crazy?!”  This may be your reaction when your Moneta Family CFO recommends rebalancing your portfolio—and you aren’t the only client feeling that shiver of anxiety in these turbulent times.

It is difficult to remove emotions from investment decisions.  After all, we are human, and acting emotionally is eminently human.  We want more of what is working well and prefer to sell an investment when it is performing poorly.  Many studies illustrate that the average investor underperforms.  A recent JPMorgan report compared the annualized returns of the average equity investor over the 20 year period ending December 31, 2007.  The results are staggering!

S&P 500 11.9%
Oil 8.7%
EAFE 7.9%
Bonds 7.5%
Average Equity Investor 4.5%

Our role, as Family CFOs, is keep you focused on your long-term goals, help separate emotions from your investment decisions, and encourage you to maintain your stated Investment Policy.  We want you to outperform the average investor.

To have the best chance of outperforming that average investor, it isn’t enough to simply hang in there.  You must rebalance.

From its high in 1929, the Dow took about 25 years to recapture that high.  However, a portfolio of 70 percent Equities (75 percent large cap and 25 percent small cap) and 30 percent Government bonds that was rebalanced each year, would have recouped the loss after only seven years.*

From its high in 1973, the Dow recaptured its loss in about eight years.  However, the same asset allocation (70 percent Equities (75 percent large cap and 25 percent small cap) and 30 percent Government bonds) rebalanced each year, would have recouped the loss in just four years.*

One last and impressive example: From its high in 2000, the Dow took seven years to regain the previous level.  However, that 70/30 portfolio rebalanced each year, would have recouped the loss in just four years.*

It is time to rebalance your portfolio back to the Investment Policy allocation that was developed during less stressful times.  No one can know what will happen or how long the recovery will last, but history and experience teach us that the rebalancing strategy—the one your Family CFO discussed with you at the beginning of your relationship—is the appropriate strategy to follow if you want to outperform that ‘average investor’.


*Performance returns shown are those of various asset classes.  These model returns do not represent actual investment decisions by Adviser and, thus, may not reflect the impact that material economic and market factors might have had on our decision-making if Adviser were actually managing the money.  Performance returns were calculated after the periods shown.   Performance returns reflect the reinvestment of dividends and are calculated based on total return, including gains or losses plus income, without deducting Adviser’s advisory fee.  Mutual funds in which the client’s assets may be invested charge their own advisory and other fees as described in each fund’s prospectus. 

Past performance is no guarantee of future results.

Kara Harmon, CPA, CFP®, AWMA, CRPC®

Kara is the professional consultant for Dave Sadler.