Does this mean investors should reallocate? At Granite Group, we are proponents of rebalancing. However, we believe a systematic approach to rebalancing is the most efficient way to reallocate your assets.
Usually investment styles move in longer-term trends and can last for a year or more at a time. An investor would limit their returns and the potential upside if, for example, they’re rebalancing every month or quarter in an asset like large growth instead of letting the asset appreciate through an investment cycle. When considering rebalancing, the process should default to the original personal allocation, but it should be done at most once a year. Rebalancing in a systematic and methodical way lowers the risk of being imbalanced once the markets do return to some kind of normalcy. So, let the investment styles come to fruition and rebalance only as needed.
What should investors focus on instead?
Rebalancing debates aside, it’s imperative that investors start their portfolios on the right footing, which means setting a personal allocation based on their risk profile and current needs. Factors to consider in that personal allocation calculation should include your retirement timeframe, your personal cashflow needs, whether you’re saving for a major life purchase such as a house or planning for children.
Solve the risk/needs equation first and then design a personal allocation around it. Once you have your allocation set, stick to it. Reallocate once a year if the allocations drift outside pre-determined rules. Let the styles within your allocation run. If you are in a 401k target date/lifestyle/allocation fund, verify that your allocation within the fund rebalances automatically and identify how often.
At GGA Retirement, we offer employees in our 401K plans receive a customized personal allocation and automatically rebalanced portfolios. We’re here to help employees, employers and advisors. Give us a call at (203) 210-7814 if you have questions about the issues raised in this blog.