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The Rebalancing Bonus: Understanding Its Importance for Your Investment Portfolio Thumbnail

The Rebalancing Bonus: Understanding Its Importance for Your Investment Portfolio

Investment Management

At Integrity Financial Planning, we understand the importance of maintaining a well-balanced investment portfolio. One crucial aspect of this is the rebalancing bonus, a concept that can help you optimize your investments over time. In this blog post, we'll explain the rebalancing bonus, how it works, and why it's essential for your investment success. 

What is the Rebalancing Bonus?

Let's explore how rebalancing can benefit your portfolio in real-world situations. For instance, let's examine the annual returns of stocks (S&P 500) and bonds (10-year treasuries) from 1928 to 2022. The S&P 500 had a return of +9.6%, while 10-year treasuries had a return of +4.6%. If you allocated 60% to stocks and 40% to bonds, you would get a 60/40 proxy return of 7.6%.  

However, market returns can fluctuate greatly, making it helpful to see how rebalancing a 60/40 portfolio would have worked using actual returns. Rebalancing a portfolio annually with the same two asset classes to maintain the 60/40 target weight would have resulted in an 8.2% return over the same period. The difference between the 8.2% and 7.6% returns is known as the rebalancing bonus.  

This bonus refers to the potential increase in portfolio value that can result from periodically adjusting your investments to maintain your target asset allocation. By buying low and selling high, you can take advantage of market fluctuations, leading to better long-term investment performance. For example, if your target allocation is 60% stocks and 40% bonds, but market fluctuations cause your actual allocation to become 70% stocks and 30% bonds, you would need to sell some stocks and purchase bonds to return to your original target allocation. This rebalancing process allows you to lock in gains from the stock market while buying bonds at a lower price. 

Rebalancing can be particularly beneficial during volatile market conditions, as it allows you to take advantage of short-term price fluctuations while maintaining your long-term investment strategy. 

Why is the Rebalancing Bonus Important for Your Portfolio?

There are several reasons why the rebalancing bonus is essential for your investment success:

  1. Risk management: Regularly rebalancing your portfolio helps ensure that your investments remain aligned with your risk tolerance and investment goals. By maintaining your target asset allocation, you can effectively manage the overall risk level of your portfolio.
  2. Improved performance: The rebalancing bonus can potentially enhance your portfolio's long-term performance by allowing you to capitalize on market fluctuations. By buying low and selling high, you can take advantage of short-term price movements while staying focused on your long-term investment strategy.
  3. Disciplined investing: Rebalancing encourages a disciplined approach to investing by promoting the habit of regularly reviewing and adjusting your portfolio. This can help you stay on track and focus on your financial goals.

How Can Integrity Financial Planning Help?

At Integrity Financial Planning, we can help you implement a rebalancing strategy tailored to your unique financial situation and investment goals. We work with you to determine the optimal asset allocation for your portfolio and provide ongoing support to ensure your investments remain aligned with your objectives. 

In addition, we can help you incorporate tax-efficient strategies, such as tax loss harvesting, into your rebalancing process. This can further enhance your investment performance and help you achieve your financial goals more efficiently. 

The rebalancing bonus is a valuable concept that can significantly impact your investment portfolio's long-term performance. By understanding and implementing this strategy, you can optimize your investments and stay on track to achieve your financial goals. At Integrity Financial Planning, we're here to help you navigate the complexities of investing and provide personalized guidance to ensure your success. To learn more about how we can help you manage your portfolio more efficiently, book a meeting here.