Investor's Alpha: Systematic Portfolio Rebalancing

Feb. 15, 2017 5:39 AM ET2 Comments
Adam Hoffman, CFA profile picture
Adam Hoffman, CFA


  • Systematic portfolio rebalancing forces the ultimate investor axiom to hold true: Buy low, sell high.
  • Portfolio rebalancing is a risk mitigation strategy, not a return maximization strategy.
  • A rebalanced portfolio will outperform in an oscillating market.

With the possibility of low returns over the next five to ten years, the challenge is how to increase returns without taking on undue risk. Peak Capital posits that the key to enhancing returns in the "new normal" is to focus on factors that the investor controls:

  • Savings Rate & Spending Rate
  • Systematic Portfolio Rebalancing
  • Proper Asset Allocation
  • Tax Management
  • Proper Asset Location
  • Investment Expense

For those that read our 2017 Economic Projections, you will be familiar with these areas of return. These six inputs to the investment process can help improve portfolio outcomes where the market is expected to return ~3% for a 60% global equity and 40% fixed income portfolio. In this part of our Investor's Alpha series, the focus will be on the value that systematic portfolio rebalancing can add on your returns. Some of this value will be readily apparent on a portfolio summary - increased return - and part of the value will not be tangible on a brokerage statement - reduced risk. The goal of the Investor's Alpha series and this part is to illustrate the value of investor controlled inputs to increasing portfolio returns and meeting investor objectives.

Systematic portfolio rebalancing forces the ultimate investor axiom to hold true: buy low, sell high. Having a set of rules to guide the construction and maintenance of the portfolio can enhance returns. Vanguard Advisor's Alpha (1) research paper concludes that annual portfolio rebalancing may add up to 0.35% to portfolio returns for a 60% stock/40% bond portfolio. It is also important to note that rebalancing is not a return maximization strategy; rather, it is a risk realignment strategy. Without rebalancing, over time the more volatile assets will increase in relative size to less volatile holdings, i.e. without rebalancing stock allocation will increase.

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This article was written by

Adam Hoffman, CFA profile picture
Adam Hoffman, CFA, CAIA is the founder and CCO of Peak Capital Research & Management, LLC. Peak Capital Research & Management is a fee-only wealth management firm.  Our firm always places the interests of our client's first.  Peak Capital Research & Management is a fiduciary and will always act in the best interest of the client, even if it does NOT benefit the firm.

Disclosure: I am/we are long VTI, VXUS, VCSH, VCIT, VMBS, VFIIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Peak Capital Research & Management's clients are long the following positions in either Vanguard ETFs or Mutual Funds or utilizing a similar iShares ETF. Broad US Index, Broad International Index, short-term corporate bonds, intermediate-term corporate bonds, and GNMAs.

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