The Case For Rebalancing Looks Compelling…Again

Market volatility is unnerving, but it usually represents opportunity. Relatively few investors see it that way, of course, which is why so few investors are able to exploit rebalancing opportunities in the long run. On the other hand, the crowd’s inability or unwillingness to rebalance in a timely manner is a big reason why a relative handful of investors can cash in on the rebalancing there’s a rebalancing bonus. But if you missed it the last time, don’t worry: Mr. Market makes it easy to try again, as the recent turmoil reminds.

Consider how the major asset classes stack up on a year-to-date basis through yesterday, based on representative ETFs and ETNs in the table below. Once again, diversity of return is conspicuous. In effect, a new invitation to rebalance has just arrived. There are other ways to earn a profit in the money game, but routinely rebalancing a broad set of asset classes is a strategy that’s available to everyone. The fact that it works doesn’t hurt, either. It does require a fair amount of emotional discipline, however, which is what trips up most folks. Good thing, too, since the return premium linked with rebalancing would surely dwindle if not vanish entirely if the crowd learned how to become intensely opportunistic on a regular basis. In theory, that’s a concern. In practice, well, let’s just say that you shouldn’t lose any sleep worrying that the rebalancing bonus is set to evaporate.


This post originally appeared at Capital Spectator and is reproduced here with permission.