Portfolio Rebalancing

Posted on Monday, September 8th, 2008 | In Market Commentary

Contributed by: Wayne Koh (http://waynekoh.com) -

Besides “Drip In Money” strategy as the key to investment discipline, the other important aspect of investing is to control the emotions that comes bundled with it, like it or not.

Rebalancing your portfolio is as simple as managing your “emotions” in the up and down cycles of the market. In fact, investing needs to be boring. And by boring, I mean a rationalized range of value that is not too high, yet not too low. Rationalization also means certain rules are in place.

Below is an example of portfolio rebalancing with the following vital stats:
a) portfolio starting point is a 50% : 50% (Equity:Bonds) allocation
b) trigger point of rebalancing: whenever deviation of the two funds is 5% or more.

In contrast, another “Buy aNd Hold” portfolio of the same 50% : 50% (Equity:Bonds) allocation at the starting point chooses not to rebalance.
You will find that the “Buy aNd Hold” portfolio experiences a higher “high” as well as lower “low” than the “Rebalance” portfolio. All switching costs incurred during the rebalancing are accounted for.
At the end of the period, the “Rebalance” portfolio still wins by 0.8%.

In conclusion, rebalancing not only helps to smoothen out the too-high-too-low to just-nice, it actually helps the portfolio to be more rationalized, and yes, boring. And boring means getting less emotional.

Good read==> Reuters: Rebalance your portfolio