automatic portfolio rebalancing

dipsomaniac

does anyone agree with this concept of constantly taking profits/realising losses? some providers rebalance on a daily basis, this has to increase costs and have a detrimental effect on returns.

dunstonh

rebalancing a portfolio is a vital part of investing. Without it your portfolio would go out of sync and the risk profile and asset or sector allocation would change from what you intended.

A number of providers do not make any charges for this and those that do usually charge a very small amount (typically looking at 0.25% of the amount switched).

As I an IFA I do it annually for most contracts under active management. Daily is far too frequent in my opinion. Larger portfolios would see more frequent rebalancing.

dipsomaniac

Thanks Dunstonh. I agree that portfolio balancing is a vital part of investing and I review my clients portfolios on a 6/12 monthly basis.

Some providers offer automatic daily rebalancing on their multi manager products. I also think this is too frequent and have not seen any evidence that this improves returns on a rising market. Has anyone done any research on this model?

JDinho

I'm curious as to why anybody would favour such frequent rebalancing, as you rightly say it would definitely increase transaction costs.

Most portfolio models would incorporate some sort of agreed tolerance levels to prevent frequent rebalancing e.g. +/- 5% would not excessively high. Realistically prices could move that much during trading and finish where they started. Investing is for the long term therefore rebalancing daily or even weekly movements are hardly in keeping with such time horizon.

Also where would you draw the line? Some slight gains may be completely erased through the transaction costs/time out of the market effectively costing money.