Asset AllocationSeptember 1, 2022

Allocators Rebalance Too Often, JPM Says

Instead of rebalancing quarterly or monthly, do it annually, and more strategically, the firm advises.

Reported by Larry Light

Rebalancing needs to get rebalanced itself. So says a recent commentary from JPMorgan Asset Management. Trouble is, asset allocators rejigger their portfolios too often, according to JPM’s head of institutional strategy, Jared Gross.

Monthly or quarterly rebalancing is doing nothing to improve performance, he said. What’s better, he explained, is to replace 10% or more of a portfolio every year, using flexible strategic assessments.

An annual reallocation fares better through time, compared with monthly or quarterly re-dos, JPM data indicate, using a 60/40 stock-bond breakdown. “Raising the bar for rebalancing – even in volatile markets – may raise returns over the long run,” Gross contended.

He went on to state the ideal: “Well-diversified private strategies reallocate capital internally across assets, sectors, and geographies to take advantage of market swings to improve long-term performance.”

The shorter-term reallocations fall short, he said, because “they are hard to reconcile with the longer-term trends of financial markets.”

Reason: “Frequent sharp reversals over short time horizons are not the norm, yet mechanical rebalancing strategies are constructed around capturing just such movements.” The average bear market has lasted 22 months, while the average bull market has lasted 56 months, he noted.

The best rebalancing opportunity is when two asset classes move at the same time in opposite directions, he said. Sometimes stocks will move one way, but bonds won’t make much of a move. Rather than shuttle between the two, some investors maintain a large reserve of cash to buy in one direction or the other.

The problem with that, Gross wrote, is that “the return drag that it would create over longer horizons would likely outweigh the benefits.”

Using alternative assets in rebalancing is often not a good idea, as they are best kept aside for liquidity needs and for long-term appreciation, he said. “It makes little sense to withdraw capital from private strategies that are built around carefully constructed portfolios of illiquid assets that accumulate value over long time horizons,” Gross declared. “Selling these strategies in reaction to volatility in public markets short-circuits this process.”

More thought is required in rebalancing than many investors employ, he indicated. Wrote Gross, “Mechanical rebalancing is no substitute for a thoughtful process that incorporates the latest macroeconomic and market data alongside a rigorous asset allocation model.”