Tactical, as Opposed to Calendar Rebalancing
Seeking Alpha, December 25, 2007
Larry MacDonald
Tactical rebalancing might be a better option than the commonly used calendar- or threshold-based approaches. Here is an excerpt of a note to that effect sent to me by Warren MacKenzie of Second Opinion Investor Services and author of The Unbiased Investor.
"To override the normal ‘fear and greed’ response it is important for the rebalancing strategy to be in writing and part of an investment policy statement. The rebalancing can be implemented either annually or when asset classes grow beyond a set amount by say 10%.
In cases where money is being added on a regular basis the rebalancing can be done by investing the new money into the asset class which has fallen in value. If money is being withdrawn (for example by retirees) the rebalancing can occur by withdrawing from the asset class which has risen in value.
The above explains rebalancing on a ‘strategic asset allocation’ basis. We believe this ‘strategic’ asset allocation rebalancing represents the minimum level of adherence to an investing process.
We believe that ‘tactical’ rebalancing can reduce risk and slightly increase the expected return. We urge clients to ask their advisor about ‘Tactical’ rebalancing. Tactical rebalancing can easily be implemented simply by moving to the lower end of an assigned range when certain (written down) conditions come into being. For example, if the percentage range for Cdn. equity is 40% to 60% (with 50% being the neutral position), then when the P/E ratio is higher than 25 the tactical shift might be to move to 40% equity. When the P/E is at 10 the tactical shift might be to move to 60% equity."
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