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When to Rebalance Your Portfolio (FYI It’s a Trick Question)



With the financial markets reaching new all-time highs in April, closing out the month with a year-to-date gain of 17.51%, investors are questioning how much steam remains in the market. Fundamentally, equities look great, with almost half of the S&P 500 reporting, 77% have reported earnings per share above estimates, fueling investor sentiment to “above average”. Promising data however, fuels a series of important questions on portfolio rebalancing, questions that receive a mixed bag of responses. This month’s issue of The Samra Report provides insight into how to rebalance your portfolio, when to rebalance, and provides a guide to asset allocation.


Time should rarely be an indicator on rebalancing a portfolio. Although many advisors may agree with this statement, their investment philosophies contradict with the practice of monthly, quarterly or annually rebalancing.


At Samra Wealth Management we believe rebalancing on intervals of time poses a costly mistake. The practice of selling a stock or other asset prior to the asset reaching an optimal price level makes no sense. Furthermore, reinvesting the funds from the liquidated position to reinvest in another stock when the stock may be overpriced creates further risk of loss. Financial advisors have difficulty explaining to their clients why portfolios are rebalanced on intervals of time, as opposed to optimal price levels. If your financial advisor utilizes the practice of monthly or quarterly rebalancing, it is likely due to two reasons: (1) The advisor utilizes outdated software to manage the portfolio, software that is capable of rebalancing based on time only. (2) The financial advisor does not understand the risk this practice poses, and instead provides their clients with a false sense of confidence that their portfolio will routinely take gains off the table.


At Samra Wealth Management, our investment philosophy is research based, utilizing a sector rotational approach. As opposed to investing in all 11 sectors of the S&P 500, we invest in the 4 to 5 sectors we believe will outperform across the globe. Rebalancing of portfolios consists of assets reaching pre-determined price-points, funds may not be reinvested immediately, and held in cash or ultra-short duration fixed-income, until we believe an optimal price-point has been achieved. During times of uncertainty or increased volatility, investors are likely to see an increased tactical allocation, away from their overall strategy.

Portfolio rebalancing goes hand-in-hand with portfolio reallocation, which is, the systematic shift of investments from one asset class or sector to another. Advisors with an over-reliance on rebalancing software place client investments at risk, as funds are almost immediately invested once available. Further proving many advisors lack conviction in their investment philosophies. If you are uncertain about the direction of your portfolio, we recommend you ask your financial advisor the following questions:

1. How would your portfolio have performed if your portfolio was never rebalanced?

2. Were funds allocated immediately into investable assets, or did the advisor wait until for an optimal time to invest your portfolio?

3. What is the cost of rebalancing your portfolio?

At Samra Wealth Management, we work to eliminate the unnecessary cost of excessive trading during portfolio rebalancing. Contact us today for a complimentary portfolio X-Ray, highlighting the true cost of your portfolio as well as areas of excessive risk.

References

Bartels, M., Shields, A. and Harris, D. (2019). Fed Could Bring May Flowers Early. [online] Merrilllynch.com. Available at: https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fstockresearch%2Fapi%2Fdm%2F1.0%2Fdocument%2Fwithreadership%2F6208-11995640-1%3Fsegment%3DDIRECT [Accessed 30 Apr. 2019].

Bloomberg.com. (2019). Bloomberg. [online] Available at: https://www.bloomberg.com/markets/stocks [Accessed 30 Apr. 2019].

Buttters, J. (2019). Earnings Season Update: April 26, 2019. [online] Insight.factset.com. Available at: https://insight.factset.com/earnings-season-update-april-26-2019 [Accessed 30 Apr. 2019].

Samra, I. (2019). A Dynamic Financial Plan. [online] www.samrawealthmanagement.com. Available at: https://www.samrawealthmanagement.com/wealth-advisory [Accessed 30 Apr. 2019].

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.

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