Asset Allocation & Rebalancing
By: Ted Black, CFP©
Spring 2025 (Vol. 43, No. 1)
As often as we can, we like to offer our members new information and investment ideas that may help them be successful long term investors. We also believe there are some topics that are worth revisiting on a regular basis. Asset allocation and rebalancing fall into that category.
As a quick reminder, “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 capital preservation and long-term growth 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.
We believe it’s vitally important for every investor to carefully and realistically consider their investment time horizon and propensity to tolerate large swings in the value of their investments. The financial markets offer no guarantees and have a long history of surprising us, which will almost certainly be the case moving forward. A solid understanding of one’s personal financial situation and risk tolerance can go a long way in helping construct an investment portfolio that reflects one’s short and long-term investment goals, and that can survive the inevitable ups and downs in the market.
As an 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 60% of their investments into Stocks, 30% into Bonds, and 10% into Cash or Money Markets. If left untended, after periods in which the assets owned perform significantly different from one another, as was the case in 2023 and 2024, a portfolio may end up with an asset allocation schedule, and importantly, a risk/ reward profile, that is quite different from its original design.
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”. 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.
It’s never been our focus to manage investment portfolios by trying to time the ups and downs of the market, and the extreme volatility that we’ve seen in the market so far this year helps support our reasons for not doing so. Often times by the time it becomes evident that a market correction, or even a Bear market, is underway, much of the damage may already be done, and moving out of the market may prevent us from participating in the recovery. In the end, we believe that timing the market is extremely tricky business, and if done poorly can have quite a negative effect on long-term results.
Knowing that the markets are volatile and unpredictable, and that there will be both Bull and Bear markets, we suggest focusing on building diversified portfolios of high-quality, low-cost investments that are appropriate given the items regarding one’s personal situation mentioned earlier.
“The market hates uncertainty” is an old saying in the investment industry. Given the unpredictability of the information coming out of the White House we’re currently experiencing, uncertainty abounds and it’s making Mr. Market pretty grumpy. Many of the largest companies here in the U.S. depend on imports and exports for their product or service offerings. With the uncertainty surrounding tariffs, it’s particularly difficult for these companies to make future revenue and expense estimates. It’s our best guess is that until we see more concrete results regarding tariffs, the market volatility we’ve been experiencing the past couple of months will continue.
If you have 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.