Once a portfolio is formed, the asset class proportions comprising the allocation will diverge from the target proportions as security prices fluctuate. Left free to drift, a portfolio can evolve into an asset mix with decidedly different risk and return characteristics than the target mix. This drift automatically ensures that a portfolio is overexposed to asset classes at their market highs and underexposed to them at their market lows. In order to rebalance a portfolio to the target proportions money must be periodically reallocated from the most recent better-performing investments to the relative underperformers. In this sense rebalancing is inherently “buy low, sell high” or contrarian in nature.

Some advisors rebalance through an automated process. This can create excess trading and expenses and prevent high-performing asset classes from contributing adequately to returns. At Cardiff Park we personally review stock/bond ratios and individual equity asset allocations for each client every quarter. We suggest rebalancing when asset classes have significantly diverged from the client’s investment model.