The rebalancing must itself be rebalanced. According to a recent comment by JPMorgan Asset Management. The problem is that asset allocators rebalance their portfolios too often, according to Jared Gross, JPM’s head of institutional strategy.
A monthly or quarterly rebalancing does nothing to improve performance, he said. Better, he explained, to replace 10% or more of a portfolio each year by applying flexible strategic valuations.
Annual reallocation performs better over time than monthly or quarterly reallocations, shows JPM data using a 60/40 split of stocks and bonds. “Raising the bar for rebalancing — even in volatile markets — can boost returns over the long term,” Gross claimed.
He went on to state the ideal: “Well-diversified private strategies reallocate capital internally across assets, sectors and regions to take advantage of market volatility and improve long-term performance.”
The shorter-term shifts fall short, he said, because “they are difficult to reconcile with longer-term trends in financial markets.”
Reason: “Frequent sharp reversals over short time horizons aren’t the norm, but mechanical rebalancing strategies are designed to capture just such moves.” The average bear market has lasted 22 months, while the average bull market has lasted 56 months, he noted.
The best opportunity for rebalancing is when two asset classes move in opposite directions at the same time, he said. Sometimes stocks move in one direction, but bonds don’t make much of a move. Instead of switching back and forth between the two, some investors hold a large cash reserve to buy in one direction or the other.
The problem with this, Gross wrote, is that “the yield drag it would create over longer periods would likely outweigh the benefits.”
Using alternative assets when rebalancing is often not a good idea, as they are best kept aside for liquidity needs and for long-term appreciation, he said. “There is little point in withdrawing capital from private strategies built around carefully constructed portfolios of illiquid assets that accumulate value over long periods of time,” Gross said. “Selling these strategies in response to public market volatility short-circuits this process.”
The rebalancing requires more thought than many investors do, he said. Gross wrote, “Mechanical rebalancing is not a substitute for a thoughtful process that incorporates the latest macroeconomic and market data along with a rigorous asset allocation model.”
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Tags: Bonds, Bull, Ebalancing, Jared Gross, JP Morgan Asset Management, JPM, Market Data, Personal Strategies, Stocks
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