Quarterly Newsletter

Market View: The Importance of Portfolio Rebalancing

When markets move up and down, the returns from different asset classes can cause a portfolio to move away from its initial allocation. As allocations shift, failing to rebalance can change the risk profile of the portfolio, as some asset classes are riskier than others. Investors should be aware of this and keep their asset allocations close to target.

For example, imagine a portfolio divided evenly among the five asset classes shown in the chart at right. Over a three-year period ending December 31, 2006, the first pie chart shows an allocation that was rebalanced periodically to keep 20 percent in each asset category. The second chart shows how the allocation could have changed over the same time period if the portfolio was never rebalanced.

This example shows that a portfolio’s risk profile can change if it is never rebalanced. Investors should periodically check their asset allocations to make sure they are still close to their targets, and rebalance if necessary.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

Investment information can change rapidly and the changes can be significant particularly in volatile markets. For this reason “as of”’ dates are provided for specific data where applicable. The information should not be considered current after the dates provided.