The Benefits of Rebalancing – How Rebalancing Can Help Build Wealth | Mission Wealth

[Music] At Mission Wealth we follow a disciplined approach to rebalancing, reviewing accounts on at least a quarterly basis for rebalancing opportunities. What is rebalancing? Simply put, it is a process whereby we sell assets that have experienced relative outperformance in favor of assets that have experienced relative underperformance. On the one hand, it ensures our client portfolios maintain alignment with their defined risk return. Target profiles. For instance, at a 60 stock 40 Bond portfolio doesn’t migrate towards a 70 stock allocation. On the other hand, disciplined rebalancing implicitly forces us to follow a “Buy Low Sell High” methodology and has proven to add value over time. So let’s see how rebalancing Works in practice. Let’s assume a very basic portfolio made up of just two asset classes. Let’s assume just stocks and bonds with an equal Target allocation of 50% to both. Now let’s also assume some return parameters over two separate periods. In Period one, stocks do very well and return 15% while bonds Trail returning just 1%.

Again we start with a 50% allocation to stocks and a 50% allocation to bonds. At the end of the first period the total portfolio returns 8%, however the allocation split between stocks and bonds changes to 53% stocks and 47% bonds as a result of the relative outperformance of stocks. Now let’s assume that in the second period stocks sell off and lose 10% while bonds rally returning 5%. Let’s also assume we make no adjustments to the portfolio entering period two. At the end of the second period, the portfolio would have lost 3%, however had we rebalanced the portfolio back to the original 50% stocks 50% bonds target allocation, the portfolio would have only have lost 2.5% during the second period, resulting in a half a percent performance enhancements. Obviously this is a hypothetical example over two periods with just two asset classes but it highlights the importance of a disciplined periodic rebalancing methodology. Our portfolios are typically made up of multiple asset classes within both stocks and bonds. Such as large cap, small cap, U.S stocks, and international stocks to name just a few. Each additional asset class provides

another opportunity to leverage the benefits of disciplined rebalancing. By trimming an asset on relative strength in favor of another asset that has recently underperformed. The benefits of disciplined rebalancing may be enhanced during periods of Market volatility. This chart indicates the potential benefits of rebalancing during times of Market dislocation. Such as the period 2005 through 2014, which encompasses a great financial crisis of 2008. In this example, quarterly rebalancing added a full 5% points to Total return on portfolio. Indeed, following a disciplined approach to rebalancing has proven to add value over extended periods of time. And is estimated to add 0.89% of annual performance enhancement to a portfolio. These benefits underscore the reasons why we follow a disciplined approach to portfolio rebalancing at Mission Wealth.