Is there a universal investment ideal?

If there is, it is this: You may want to buy low and sell high, as well as implement asset allocation and rebalancing. What if I told you that there was a process for doing just that?


Rebalancing – Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.


The process of rebalancing goes against our core human instincts. Let's start with an example.

            If you look at this portfolio you will see that you have 15% in US Small Cap, 15% in International Value, 15% in Global Bonds, and then 55% in everything else. (This is just an example for discussion purposes, not a well-engineered portfolio.) If we give the portfolio some time and the market shifts around, we might notice that your intended allocations have strayed from their target. We might see that US small cap ends up being around 25% of a portfolio, but international value lost some value and now is at 5%.

            In order to rebalance we would sell some of that US small cap, which has done really well, and then buy more of the international value, which has done poorly. Our instincts tell us to do the opposite – why would I want to sell what's done well and buy what's done poorly? Our gut instincts are wrong. Rebalancing is a forced way to sell what's high and buy what's low. This can be very hard to do because our gut tells us not to do it. Yet, it's very important.


            Rebalancing is similar to driving. Could you close your eyes and drive for 60 seconds without a problem? Of course not, you'd end up in the wrong lane or hit something. You need to make constant judgments when you're driving to stay in the correct lane. Rebalancing works in a similar way – it helps keep our portfolio from straying off the path it was designed for. Just as we can't close our eyes when driving, we can't close our eyes when it comes to rebalancing, either. Luckily, this is one of the things that we take care of for clients, so you don't need to worry much about it. It's just important that it's done and that you know it's happening.

            Rebalancing makes a great deal of sense once you understand the basics: It gives you a clear, evidence-based process and effective solution for staying on course toward your personal goals through rocky markets. It helps ensure you are buying low and selling high along the way. What's not to like about that?

            Rebalancing within a globally diversified portfolio requires both emotional resolve as well as informed management to ensure it's being integrated consistently and cost-effective.