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Alternative Market Briefing

Investors should rethink automatic portfolio rebalancing, study says

Monday, April 01, 2019

Bailey McCann, Opalesque New York:

Can automatic rebalancing end up doing investor portfolios more harm than good? A new study from Man Group suggests that automatic rebalancing can mean that investors sell out of profitable investments at exactly the wrong time.

"Rebalancing is an active strategy that can actually end up making the impact of drawdowns on a portfolio worse," explains Otto Van Hemert, Head of Macro Research at Man AHL and one of the authors of the paper in an interview. The paper shows that investors often aren't aware of the impact of rebalancing in a traditional 60/40 portfolio, but in practice, it's an active strategy that often means selling winners and buying losers. As a result, automatically rebalanced portfolios tend to underperform portfolios that use a buy and hold strategy, or those that are more consciously actively managed.

"Investors think of rebalancing as passive but it's an investment decision. The alternative, which is not rebalancing, is not ideal either, obviously," he says, adding that the problem with buy and hold is that the asset mix tends to drift over time which could limit diversification. Ultimately, it's important for investors to understand that any strategy is made up of active investment decisions and how you make those decisions can have an impact on portfolio performance. The figure below shows how these approaches play out over time.

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