The assets in your portfolio will likely deliver different returns over time, particularly as markets move and various holdings outperform and underperform others. The composition of your portfolio will therefore inevitably drift away from its original optimal asset mix. This may result in an increase in your risk exposure, particularly if the mix becomes increasingly concentrated to higher risk (and potentially overpriced) asset classes such as shares, and underexposed to the more conservative investments. For these reasons, it is important your portfolio is periodically ‘rebalanced’ back to its target asset mix.
At Six Park, we closely monitor the asset mix in your portfolio and undertake periodic rebalancing to ensure your investments are allocated in line with your intended risk-return profile. Our rebalancing techniques minimise unnecessary transaction costs and tax consequences wherever possible. We do this by systematically directing new cash inflows into underweight asset classes, by favouring overweight asset classes as a source for any withdrawals and by periodic rebalancing when a portfolio’s asset allocation has drifted from its targets by predetermined minimum thresholds.
Rebalancing: research and studies
There is a wealth of research showing the benefits of portfolio rebalancing. One respected paper by Burt Malkiel and Charles Ellis demonstrated that rebalanced portfolios generated an average of 0.4% more per annum over a 10-year period (1996 and 2005) – and with less volatility – than portfolios that were allowed to drift. Numerous other studies (e.g. Plaxco & Arnot 2002, Swenson 2005; Forbes 2011) have found similar results over different time periods.