When it comes to investing, emotion is not your friend. In times of economic crises, emotional reactions can impact and endanger financial decisions (Figure 1). Investors tend to fluctuate between the poles of greed and fear. Right now is a time of heightened fear. The fear about our collective health is real.  We have real control over how we follow personal hygiene, social distancing, and other guidelines. However, the control each of us has on the economy and, by proxy, the stock market is negligible. 

It is important to focus on things we can control right now. For investment portfolios, we cannot control the direction of markets over the coming weeks and months. However, we know that the global economy will eventually rebound and that the way we invest in stocks—globally diversified portfolios—helps to ensure your portfolio will rebound as the markets do. The question is not “if” but rather “when”. 

Currently, we as your wealth manager are focusing our energy on things we can control that add value to your portfolio and financial life. Rebalancing is one such example. You may see trades in your portfolio over the coming days as we rebalance to take advantage of the current market environment. 

One question we get frequently is how we think about rebalancing. Our perspective on rebalancing emphasizes four things: (1) Maintaining target exposures to allocations; (2) Systematically buying low and selling high; (3) Keeping transaction frictions low; and (4) Opportunistically tax-loss harvesting. We explore each of those considerations below:

1. Maintaining target exposures to allocations: The primary goal of rebalancing is to keep portfolios from drifting far beyond their intended risk profile. To highlight this, let’s take a portfolio invested 50% in stocks and 50% in bonds. If we start the clock in 1979 (the earliest year we have data for the full US stock market) and don’t rebalance, the portfolio drifts from 50% stocks to 81% stocks and drops from 50% bonds to 19% bonds by the end of March this year. The portfolio is a lot more aggressive than was originally designed. Rebalancing helps maintain discipline and diversification, so you don’t wake up in a meaningfully different portfolio than intended. After all, the larger the allocation to bonds before a downturn, historically the quicker a portfolio bounces back.


2. Systematically buying low and selling high: By having target allocations for each asset in your portfolio, rebalancing ensures we are trimming positions that have risen in value faster than the rest of your portfolio, and reallocating those funds to asset classes that are relatively depressed. Instead of timing markets, having target weights means that we are selling assets as they get more expensive, and buying assets as they become discounted. 


3. Keeping transaction frictions low: Some robo-advisors advertise daily rebalancing. We believe this is detrimental to portfolio returns. Trading is like taking a toll road: the more you get on and off, the more those incremental costs add up. When you trade shares at a gain, it creates a taxable event that drags down after-tax returns, not to mention the costs of the trade itself. Even when stock trades are advertised as “free”, they are not. You simply don’t see the costs. Many high-frequency traders pay custodians to let them route trades (known as payment for order flow) which can add costs to trades (i.e., the stock is slightly more expensive than it otherwise would have been). We believe rebalancing around once per quarter gives a good balance between maintaining target exposures and keeping trading costs low.  


4. Opportunistically tax-loss harvest: Since we are invested in globally diversified stock funds, there may be the opportunity to sell shares at a loss and buy into funds with similar exposures on the same day. In these cases, the loss on the shares can be used to offset other investment gains either this year or over the course of the next few years. Doing so allows us to keep portfolios on target (per our first consideration) while also generating currency that can be used to lessen taxes now and potentially in the future.

While it may feel like someone can predict market movements and exit/enter at the “right” time, this is driven by emotions. In reality, this is no more than speculation and luck. Rebalancing is one example of something we have control over and can use to our advantage in the current environment.  It is one of the core tenets of our investment philosophy that is built on financial research and science to position


1. US total stock market represented by the Russell 3000 index and bond market represented by the Barclay’s US Aggregate index you for success now and in the future. The way we invest in the stock market helps to put you in the position to realize the full rebound whenever it occurs and without speculating along the way. In these unprecedented times, we remain committed to adding true value to your portfolio and financial well-being.  Should you have any questions or concerns, please do not hesitate to reach out to your advisory team.

Disclosures: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.