Percentage portfolio movement which signals time to rebalance


I was on a McGill Advisory webinar recently, (topic investing) and they had nothing bad to say about passive investing and managing your own portfolio.  They did surprise me with two things that I would like your feedback on:

1. They rebalance at 25% increase or 10% decrease. Not sure why the 25% up before they move but wanted your thoughts on this.

2. They manage many clients so they use the S&P500 market level to determine the percentage up or down rather than looking at the individual portfolio performance. This sounds simple rather than looking at various accounts so what do you see as the downside here?

Monday Morning Millionaire Program Answer:

Rebalancing to your personal asset allocation, say 50/50, is a technique to manage risk. Through the course of a market cycle, that is, peak to trough to peak  (4 to 5 years), a 50/50 portfolio  will roughly equal the S&P 500 performance with half the risk, namely half the volatility. The percentage of portfolio movement which signals the time to rebalance is arbitrary. Using a smaller percentage decrease to signal buying will result in more frequent purchases of smaller bargains. Using a larger percentage increase to signal selling will result in taking profits at a higher level.

The subject merits a closer look and we deal with it in our January 21 blog.

To answer your second question, the major downside is that many client portfolios seem to be actively managed. Based on the evidence as reported in the academic financial literature, the Monday Morning Millionaire Program philosophy recommends that core portfolios should mirror the S&P 500 through the use of the appropriate exchange-traded fund and be left alone. That is, they should be passively managed. Evidence shows that any other portfolio makeup is virtually certain to underperform. Consistent, long-term outperformance is possible but rare.

Using the S&P 500 market level to measure the percentage, fully makes sense since all but the most poorly constructed portfolios will move in tandem.





Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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