The Best Way to Rebalance Portfolios

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Helping a client reach their financial goals while managing risk is the most fundamental part of an investment advisor’s job. Rebalancing is key to doing it well, but there is no universal agreement on the best way to implement the process.

Each year in my company Advyzon’s annual survey, we ask the advisory firms we work with a series of questions regarding their firm and their practices. This year, we asked advisors how frequently they rebalance, which yielded interesting results.

Out of 300 respondents, roughly 30% said they rebalance quarterly, about 15% said annually, and the remaining 55% said, “Depends on the client.” We weren’t surprised that so many said it depends on the client, but we wanted to understand what that means in practice.

In this article, I cover the most popular approaches to managing the rebalancing frequency. This may help you feel confident in your own approach or give you new ideas.

The case for quarterly rebalancing

The biggest arguments in support of quarterly rebalancing are market volatility and/or major bull (or bear) markets. In these cases, allocations can shift off target in a relatively short period of time. A quarterly rebalance maintains the allocation that is appropriate for your client. Waiting to rebalance annually could leave your clients with a portfolio that doesn’t match their risk tolerance.

Since most advisors bill quarterly, timing your rebalancing to sync with your reporting and billing cycle is another benefit to this approach. It also creates a natural opportunity to discuss any adjustments with clients.