Investment Institute

The Importance of Rebalancing

After years of positive returns across most major asset classes, investors may be taking a set-it-and-forget-it approach to their portfolios. Over time, this can considerably alter a portfolio’s risk/reward profile—to the point it is no longer aligned with the investor’s goals. The solution? Rebalancing.

Rebalancing:

Taking profits from high-performing asset classes and reallocating them into areas that have underperformed; this can help manage investment risk.

Strong performance of equity markets could mean extra risk for your portfolio

The current equity-market recovery has surpassed the return and duration of the average bull market.

Average bull market return: 178%. Current bull market return (March 2009 to present): 335%

Sources: Bloomberg and Wells Fargo Investment Institute, as of June 30, 2019. Market represented by the S&P 500 Index, a market-capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market. For illustrative purposes only. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. A price index is not a total return index and does not include the reinvestment of dividends.

What can happen without rebalancing

An example of portfolio drift during the period January 1990 to December 2018.

Original allocation based on investors’ investment objective

Average allocation without rebalancing

As equities outperform bonds, they take a greater share of the portfolio.

Volatility of yearly returns: 9.98%

Volatility is measured using standard deviation of monthly returns, which is a statistic that reflects the degree of risk surrounding the outcome of an investment decision. The higher the standard deviation, the greater the risk.

Index return information is provided for illustrative purposes only. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions, and generally do not reflect deduction for fees, expenses, or taxes applicable to an actual investment. Stocks are represented by the S&P 500 Index. Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index. The S&P 500 Index is a market capitalization index composed of 500 stocks generally considered representative of the U.S. stock market. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based index that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An index is unmanaged and not available for direct investment. Past performance does not guarantee future results.

Hypothetical benefits of diversification and rebalancing cumulative return

The balanced portfolio that is rebalanced regularly outperformed all others during this time period (January 2000–May 2019).

Sources: Morningstar Direct and Wells Fargo Investment Institute; as of May 31, 2019. Performance results for the Moderate Growth and Income Four Asset Group portfolio without private capital (PC); and 60% S&P 500 Total Return Index, 40% Bloomberg Barclays Aggregate Index portfolios are hypothetical and are presented for illustrative purposes only.

Performance results for the Four Asset Group without private capital and the 60/40 portfolios are hypothetical and for illustrative purposes only. Hypothetical results do not represent actual trading. The indices reflect the historical performance of the represented assets and assume the reinvestment of dividends and other distributions. Index returns reflect general market results and do not reflect actual portfolio returns, the experience of any investor, or the impact of any fees, expenses, or taxes applicable to an actual investment. Because the HFR indices are calculated based on information that is voluntarily provided their actual returns may be higher or lower than those reported. Unlike most asset class indices, HFR Index returns reflect deduction for fees and expenses. An index is unmanaged and not available for direct investment. Hypothetical and past performance does not guarantee future results. Please see the end of the report for the risks associated with the representative asset classes and the definitions of the indices.

Moderate Growth and Income Four Asset Group model portfolio without private capital: 3% Bloomberg Barclays 1–3 Month Treasury Bill Index, 11% Bloomberg Barclays U.S. Aggregate Bond Index (5–7Y), 6% Bloomberg Barclays U.S. Aggregate Bond Index (10+Y), 6% Bloomberg Barclays U.S. Corporate High Yield Bond Index, 3% JPM GBI Global ex.-U.S., 5% JPM EMBI Global, 20% S&P 500 Index, 8% Russell Midcap® Index, 6% Russell 2000® Index, 5% MSCI EAFE Index (USD), 5% MSCI EM Index (USD), 5% FTSE EPRA/NAREIT Developed Index, 2% Bloomberg Commodity Index, 3% HFRI Relative Value Index, 6% HFRI Macro Index, 4% HFRI Event-Driven Index, 2% HFRI Equity Hedge Index.

Keep your portfolio on track

The key takeaway here: Periodic rebalancing can be an important part of managing a portfolio. Be sure to schedule a portfolio review with your advisor at least annually.

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Our “The importance of rebalancing” report shares more about when, why, and how to rebalance your portfolio.

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