Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 415

Don’t underestimate the value of active rebalancing

If there were ever a year in which the benefits of rebalancing were clear, 2020 was it.

We’re still immersed in the middle of a market, economic and societal event like none of us have ever experienced. We’ve all been impacted, if not directly to our health, then by changes to the way we work, the way we connect to each other and certainly by the way we think about financial security.

When markets are rising calmly, it can be easy to underestimate the importance of disciplined rebalancing. But when markets gyrate wildly, as they did in March last year as the pandemic shuttered many aspects of the global economy, the value of active rebalancing can’t be understated.

Minimise the drift

As the chart below demonstrates, a hypothetical balanced index portfolio that has not been rebalanced since the last major bout of market volatility during the GFC Crisis would have ended 2020 looking more like a growth portfolio, and would have exposed the investor to unintended risk.

Indeed, without rebalancing, by the end of December 2020, this hypothetical portfolio’s exposure to U.S. large cap growth would have risen from 15% to 36% and the exposure to fixed income would have fallen from 40% to 20%. That's an unintended shift from a 60% equity/40% fixed income portfolio to an 80% equity/20% fixed income portfolio.

We all know the important role fixed income plays in smoothing out portfolio returns. More importantly, the portfolio would have a strong tilt to U.S. large cap growth and increasingly dominated by technology names. That tilt could be a concern if that sector were to suddenly reverse.

Source: Hypothetical analysis provided in the chart & table above is for illustrative purposes only. Not intended to represent any actual investment. Source for both chart & table: U.S. Large Cap Growth: Russell 1000 Growth Index, U.S. Large Cap Value: Russell 1000 Value Index, U.S. Small Cap: Russell 2000® Index, International Developed Equities: MSCI World ex USA Index, Emerging Markets Equity: MSCI Emerging Markets Index; Global Real Estate: FTSE EPRA NAREIT Developed Index, and Fixed Income: Bloomberg Barclays U.S. Aggregate Bond Index.

Markets turn fast, is now the right time to rebalance?

Last year, 2020, was a textbook example of how quickly markets can turn. The chart below shows just how dramatic the shift in sector performance was over the past year. For the first half of 2020, healthcare and technology stocks led the market. Within technology, those companies that benefited from the move to a virtual environment in 2020, such as Amazon, Alphabet (Google), Facebook, Microsoft and Apple, rose to represent 26% of the market cap of the S&P 500 Index in 2020. That’s a level of market concentration we haven’t seen in data we have going back 40 years! Since September 2020, traditional value-oriented sectors such as financials and energy have outperformed.

All of this speaks to the importance of regular rebalancing. Without it, it’s likely that the increasing dominance of certain technology names could push asset allocations away from their policy targets to something with a greater tilt toward growth.

A message to financial advisers: the value communication gap

We consistently find there’s a big gap between what investors believe advisors do and what advisors actually do. In other words, there’s a value communication gap between advisors and their clients. Advisors don’t always know what their clients really value. But what if you could tell your clients that by regularly rebalancing their portfolio, you have maintained their asset allocation in line with their goals, helped smooth out returns and maintained their desired risk profile?

We believe that rebalancing is one of the most vital functions advisors provide. But the value of it is often downplayed. And when it comes to devaluing this vital service, advisors may be the main culprit. Why? Because it’s something they do every single day.

Unless you clearly communicate the value of rebalancing, don’t expect your clients to appreciate it. We believe that without the help of advisors, clients are more likely to make serious mistakes, such as buying high, selling low, or running to cash at precisely the wrong time. Indeed, many investors did flee the markets in March 2020, when the initial pandemic shock hit, and may have then missed out on the subsequent rebound.

We recommend four simple touchpoints to make the communication about rebalancing both easy for you and meaningful for your investor clients.

To help your clients understand the value of active rebalancing, make sure you let them know:

  • The benefits of a systematic rebalancing policy
  • What the strategic rebalancing policy is
  • How frequently the portfolios are rebalanced
  • Your approach to strategic rebalancing during periods of market volatility.

 

Sophie Antal Gilbert is Head of Business Solutions at Russell Investments. To learn more about the 2021 Value of an Advisor Study, click here.

 

RELATED ARTICLES

With markets near record highs, here's what you should do with your portfolio

The biggest and most ignored catalyst for emerging market stocks

Investors remain remarkably defensive during bull market

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.