Why rebalancing is essential for you to reach your investing goals

One of the first decisions many investors make is regarding the asset allocation of their portfolio: this is typically the percentage of equities they’ll hold versus the percentage of fixed income assets. Asset allocations are set up to reflect the investor’s risk tolerance, investment objectives and investment timeline.  

If you’re approaching retirement, you’ll likely have a larger percentage of bonds. If you’re in your 30s, you’re more likely to have a higher percentage of stocks.

Asset classes perform differently in various market environments, so having an appropriate strategic asset allocation mix can help investors stay invested during constantly changing market conditions. Having an optimal asset allocation is only the starting point, however. To have the best chance of achieving their investing goals, rebalancing is equally essential.

How rebalancing works

Rebalancing is the process investors use to buy and sell various asset classes to maintain the asset allocation mix over time. It can be done at the asset class level (for example, equities versus fixed income), the sub-asset class level (for example, US fixed income versus Canadian fixed income) and at the individual security level (for example, single company shares).  

As markets change, the value of assets can rise and fall and, over time, this can lead to the original asset allocation becoming skewed. Regular rebalancing helps return your portfolio to its original target allocation and risk level.

It does this by minimizing the risks involved if your portfolio becomes too concentrated or if there are unintended bets to specific asset classes. It helps you to control your behaviour and minimize emotional decisions that could lead to buying high and selling low.

It’s all about the long term

While rebalancing may lead to short-term underperformance during extended periods of share price increases, overall, it provides you with a smoother, less stressful investment experience, which will put you in a better position to achieve long-term savings goals.

Rebalancing forces you to remain disciplined and bring your portfolio back to its original allocation mix by selling the top-performing asset classes and reallocating the proceeds to the worst performers. This helps portfolios to remain more consistent when markets take a tumble by buying more fixed income during bull markets and participating in the upside by buying more equities during bear markets.

To illustrate the potential impact of rebalancing, we analyzed three hypothetical portfolios (buy and hold, quarterly rebalancing and annual rebalancing) with a target asset mix of 60% equities and 40% fixed income, during the most recent extended bear market.

This includes the period before, during and after the 2008 financial crisis. The annual and quarterly rebalancing strategies outperformed the buy-and-hold approach by more than five percentage points in total returns, while also providing better risk-adjusted returns.

The annually rebalanced portfolio grew by 54.29% (2005-2015), quarterly rebalanced by 52.31% and buy and hold by 45.86%.
The hypothetical portfolios also have target weights at the sub asset class levels consisting of the constituents of the following indices: US equities represented by S&P 500 index: 27.0%; Canadian equities represented by S&P/TSX Composite index: 18.0%; international equities represented by MSCI EAFE index: 10.8%; emerging market equities represented by MSCI EM index 4.2%; Canadian bonds represented by FTSE Canada Universe Bond index 23.6%; US bonds represented by Bloomberg US Aggregate TR Hdg CAD index: 9.6%; and international bonds represented by Bloomberg Global Aggregate ex-USD 10% Issuer Capped Index TR USD Hedged index: 6.8%. An annual fee of 0.17% which represents a hypothetical management fee, was deducted from all hypothetical portfolios.

ETFs that do the rebalancing for you

Mackenzie’s asset allocation ETFs deliver low-cost, broad global diversification. They already have strategic asset allocation built in and they have a scheduled, disciplined rebalancing process. This helps investors stay on track by maintaining the original asset allocation that fits their risk level.  

Our suite of asset allocation ETFs:

Mackenzie Conservative Allocation ETF (MCON)
Mackenzie Balanced Allocation ETF (MBAL)
Mackenzie Growth Allocation ETF (MGRW)

These ETFs are designed for investors with different risk profiles, so every investor can incorporate one of these into their portfolio and never have to worry about having to rebalance them — we do all of that for you.

You can find out more about asset allocation ETFs in our article, Achieving comprehensive diversification, and you can also read more about the benefits of rebalancing in our white paper, Rebalancing your asset allocation mix.

To discuss rebalancing and asset allocation, please contact your financial advisor or your Mackenzie Sales Team. 

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