Tips on portfolio rebalance
As usual, we had several questions from users on today’s portfolio rebalance. We would like to address Frequently Asked Questions (FAQs) related to rebalancing in this newsletter.
Asset allocation first, fund selection second
We emphasize that when it comes to rebalancing, one should obey the principle that the very first goal is to have a proper asset allocation: i.e. allocation percentages to major asset classes. Only after making sure you have a proper allocation, you then work on fund selection. Regarding the importance of asset allocation and fund selection, an often cited research result is a a study by Gary Brinson, Randolph Hood and Gilbert Beebower that states asset allocation is responsible for over 90% of variations in portfolio return. Even though it is still debatable for the accuracy and applicability of this study, the result has strong intuition backing: whether a portfolio is heavily exposed to stocks or not certainly has more effects 0n the portfolio’s return than what stock or bond funds used in this portfolio. For example, in an extreme case, a 100% stock portfolio will behave drastically different from a 100% bond portfolio. For more on this topic, refer to asset allocation page.
For portfolio rebalancing, asset allocation checkup sequence is
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