Asset Allocation & Rebalancing


By: Ted Black, CFP©
Fall 2022 (Vol. 40, No. 3)

It's almost that time of year again...

This year has been a great reminder that there are happenings around us and in the financial markets that are simply out of our control. Russia’s invasion of Ukraine; runaway inflation; rapidly rising interest rates; and the ongoing supply chain issues...to name just a few. As long-term investors, we understand that markets are unpredictable in the short-term, but have confidence that over the long-term our patience and willingness to tolerate account value fluctuations will lead us to earning a rate of return that exceeds what we might earn in safe money alternatives (savings accounts, CDs, etc.) and help us achieve our major financial goals. With that said it’s important to make sure that we are staying on top of the things we can control; doing our best to build a properly diversified portfolio; keeping an eye on investment expenses; and rebalancing our holdings periodically to make sure they reflect your current risk/reward appetite.

So here we go again, revisiting the concepts of Asset Allocation and Rebalancing. As a quick refresher, “Asset Allocation” is the process of creating an investment portfolio that combines different assets (Stocks, Bonds & Cash) in varying proportions, with the ultimate goal of providing an investor with a balance between risk and reward that suits their particular situation. This approach was born from research that demonstrates that over long periods of time, Stocks, Bonds and Cash perform quite differently from one another, and as such, an investor’s mix of these assets proves to be a significant factor in their long-term results.

The benefits of balancing risk and reward by dividing investments among major asset categories such as Stocks, Bonds, and Cash equivalents has long been recognized by experienced investors. Because each of these assets can and will react quite differently to ever-changing economic and market conditions, diversifying a portfolio among various assets can help reduce volatility, and also has the potential to enhance overall returns.

For example, let’s assume that after much thought and a careful evaluation of current personal financial conditions and future financial goals, an investor decides that an appropriate asset allocation schedule calls for them to direct 55% of their investments into Stocks, 35% into Bonds, and 10% into Cash or Money Markets. Let’s call this the “base setting”. This may be a great start, and will hopefully set an investor on the road to long-term success. However, the selected investments will almost certainly change in value at different rates over time. For instance, in any given time frame, Stocks may perform notably better or worse than Bonds and/or Cash. As a result, the percentage of the overall portfolio each investment represents can and will change...sometimes significantly so.

If left untended, after periods in which the assets owned perform significantly different from one another, a portfolio may end up with an asset allocation schedule, and importantly, a risk/reward profile, that is quite different from its original design.

This leads us to the simple but effective idea of “Rebalancing”. Rebalancing is the process of making adjustments (buys and/or sells) to the portfolio to bring the asset allocation schedule back to its “base setting” or perhaps revised base setting if one’s goals have changed. And although there are no hard and fast rules as to how often an investor should rebalance their portfolio, a minimum of once per year is recommended.

In closing, let’s remember that the financial markets have a long-running history of offering the prudent and patient investor a rate of return that exceeds what’s available in safe money investments such as savings accounts and CDs. It’s my expectation that this long- running track record of outperformance will continue.

If you questions about Asset Allocation or Rebalancing and how they may currently apply to your situation, please feel free to call Ted Black, CFP® at 888-878-0001, extension 3.


Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.