Opportunistic Rebalancing: A New Paradigm for Wealth Managers

Journal of Financial Planning: January 2008

Executive Summary

• Wealth managers traditionally rebalance portfolios quarterly or annually to control risk due to asset class drifts. This paper proposes a new paradigm for planners: rebalance less frequently, but look more frequently to find the best opportunities for rebalancing.
• The proposed approach, called opportunistic rebalancing, not only controls portfolio drift, but also provides significant return improvements by capturing buylow/ sell-high opportunities as asset classes sporadically drift relative to each other.
• The paper studies a wide range of market conditions to show that rebalancing return benefits can be more than doubled compared with the traditional annual rebalancing.
• These additional benefits, attributed to transient momentum and mean reversion effects, occur sporadically in time and can only be captured by monitoring portfolios frequently.
• The studies suggest these practical guidelines: (1) use wider rebalance bands, (2) evaluate client portfolios biweekly, (3) only rebalance asset classes that are out of balance—not classes that are in balance, and (4) increase the number of uncorrelated classes used in portfolios.
• The studies show that trading costs and tax deferral are small compared with rebalance benefits.
• Opportunistic rebalancing has already been adopted by a number of leading wealth management firms across the country.

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