By David Koch, CFP®, AIF®, CFA, Senior Wealth Advisor

This post continues the conversation about Halbert Hargrove’s approach to balancing risk and reward in portfolios—with an emphasis on risk management. These articles were launched after the Covid-19 virus began wreaking havoc with the financial markets. Brian Spinelli published a piece on tax loss harvesting, and I recently wrote about HH’s Moving Daily Average (MDA) strategy. We’re sharing this information to keep you informed and educated about how HH’s investment discipline is being applied during this tough market environment.

More to the point, though, it’s important to keep in mind that our discipline is pursued consistently in every kind of market environment. Even in extremely difficult periods like the one we’re in, risk management is only half of the story. If we neglect the reward side of the risk/reward equation, in the long run our clients risk not growing their assets enough to meet their future needs.

How rebalancing works in a “typical” market environment

Rebalancing is most often a risk mitigation function. That’s because equities are rising most of the time. And when this happens, you’re selling equities to rebalance back to your target asset allocation.

Take a sample portfolio of stocks and bonds; let’s say in a 60% stock and 40% bond allocation (called a 60/40 portfolio). Since stocks tend to have a higher return than bonds over the long term, periodic rebalancing usually entails selling stocks to buy more bonds to bring you back to that 60/40 mix.

If you had bought and held a 60/40 portfolio from January 2010 to January 2020, this would have drifted into approximately 80% stocks and 20% bonds (since stocks returned more to investors than bonds). Without rebalancing back to your 60/40 target, you’d be holding a much riskier portfolio than your original intentions, with an aggressive 80% positioning in stocks.

The merits of rebalancing today  

There are times, however, like we saw in the first quarter of 2020, when rebalancing works in the other direction. If stocks are down considerably, then rebalancing by selling out of bonds and buying more stocks becomes less of a risk mitigation technique—and can potentially become a considerable return enhancement function.

If you sell bonds to buy more stocks at lower values, you therefore own more equity shares for the same dollar amount than you had before. And when stocks rebound, you will likely be seeing your portfolio’s value increase far quicker than you would with a static buy and hold strategy.

Intelligent Rebalancing®

So why do we call what we do Intelligent Rebalancing®? Because we always rebalance in the context of your individual situation. This includes considering tax impacts, trading costs, and how volatility is affecting the relative valuations of the equities we trade into—or out of—on your behalf.

Questions about rebalancing or any aspect of our discipline? Please get in touch at hhteam@halberthargrove.com

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