Best practices for portfolio rebalancing
12 November 2015 | Portfolio construction
Investors spend significant time selecting an asset allocation that falls in line with their investment goals. However, a portfolio's investments produce different returns over time, causing the portfolio to drift from its target asset allocation and take on risk-and-return characteristics that may not align with the investor's goals and preferences. By rebalancing, investors can bring their portfolio's risk back to their desired level.
The Vanguard Group, Inc.'s latest research offers best practices for selecting a rebalancing strategy.
1 Return data for Figures 1, 2 and 3 are based on the following equity and bond benchmarks, as applicable: Equities are represented by the Standard & Poor's 90 from 1926 through 3 March 1957; the S&P 500 Index from 4 March 1957 through 1969; the MSCI World Index from 1970 through 1987; the MSCI All Country (AC) World Index from 1988 through 31 May 1994; and the MSCI AC World IMI Index from 1 June 1994 through 2014. Bonds are represented by the S&P High Grade Corporate Index from 1926 through 1968; the Citigroup High Grade Index from 1969 through 1972; the Lehman Long-Term AA Corporate Index from 1973 through 1975; the Barclays U.S. Aggregate Bond Index from 1976 through 1989; and the Barclays Global Aggregate Bond Index (USD hedged) from 1990 through 2014. Except as noted, the portfolios are weighted 50% equities/50% bonds.
2 This assumes a portfolio of equity and fixed income investments; allocations to alternative asset classes or investments were not considered. Readers are referred to Vanguard research titled The allure of the outlier: A framework for considering alternative investments (Wallick et al., 2015), for further details on the implications of rebalancing when using alternatives.
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The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.
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