Calendar-Based Rebalancing in Investment: A Guide

Calendar-based rebalancing is an investment strategy that involves adjusting the asset allocation of a portfolio at regular intervals, such as monthly, quarterly or annually. This approach ensures that the portfolio maintains its intended risk profile and investment objectives over time. The essence of calendar-based rebalancing lies in its systematic nature, allowing investors to make objective decisions based on predetermined schedules rather than emotional reactions to market fluctuations.

When implementing a calendar-based rebalancing strategy, several key components come into play:

• Asset Allocation: This defines the proportion of different asset classes, such as stocks, bonds and cash, within a portfolio. Rebalancing helps maintain the target allocation over time.

• Rebalancing Thresholds: These are specific limits set to determine when rebalancing should occur. For instance, if an asset class deviates by more than a certain percentage from its target allocation, it triggers a rebalancing event.

• Time Intervals: The frequency of the rebalancing events, which can be set to monthly, quarterly or annually, plays a crucial role in maintaining the portfolio’s risk-reward profile.

There are various approaches to rebalancing and calendar-based rebalancing is just one of them. Here are a few other types:

• Threshold-Based Rebalancing: This method involves rebalancing the portfolio only when the allocation of an asset class deviates from its target by a predetermined percentage.

• Constant Proportion Portfolio Insurance (CPPI): This strategy dynamically adjusts the asset allocation based on market movements, aiming to protect against downside risk while allowing for upside potential.

• Risk-Based Rebalancing: In this approach, the focus is on maintaining a consistent level of portfolio risk rather than a specific asset allocation.

To illustrate how calendar-based rebalancing works, consider the following scenarios:

• Example 1: An investor sets a target allocation of 60% in stocks and 40% in bonds. At the end of each quarter, the investor reviews the portfolio and finds that stocks have risen to 70%. The investor sells some stock holdings and buys bonds to return to the original 60/40 allocation.

• Example 2: A family office employs a calendar-based rebalancing strategy by reviewing its portfolio every six months. During a review, the office discovers that its alternative investments have significantly underperformed, leading to a reallocation of funds towards more promising asset classes.

Implementing a calendar-based rebalancing strategy offers several advantages:

• Disciplined Approach: It removes emotional decision-making from the investment process, promoting disciplined investment practices.

• Risk Management: Regular rebalancing helps manage risk by preventing any single asset class from dominating the portfolio.

• Potential for Enhanced Returns: By systematically buying low and selling high, investors may enhance overall portfolio returns over time.

Calendar-based rebalancing is a powerful tool in the arsenal of investment strategies. By adhering to a systematic schedule, investors can maintain their desired asset allocations, manage risk effectively and potentially enhance their portfolio performance. As financial markets continue to evolve, integrating this strategy can be a key component in achieving long-term investment success.