Rebalancing Portfolios

There is a long standing practice in the investment business of rebalancing portfolios.  That is when for example a portfolio that is 60-40 stocks to bonds, due to changes in the marketplace becomes tilted too much in favor of one asset class or the other {i.e. it may now be 70-30 stock to bonds.}.  Many in the financial planning industry favor rebalancing these portfolios back to plan.  I have always had a hard time believing this needs to be done on either some formulaic basis or quarterly plan.  If nothing else, it is possible to incur sizable capital gains in taxable accounts.  This is especially true as the stock market looks at roughly two and a half years of fairly sizable gains.  

In that vain I found this article via "Marketwatch.com" yesterday of somebody else that agrees with me about rebalancing albeit while coming at this problem from  a different angle.   "According to a new study by Campbell Harvey, a finance professor at Duke University, and four co-authors from the London-based investment firm AHL-Man Group. Whenever the market is in a longer-term up or down trend, rebalancing actually increases risk, particularly downside risk. That’s because, when you rebalance, you take money away from the better-performing asset class and reinvest it in the poorer-performing one. If those two asset classes’ relative strength persists after the rebalancing, as they often do, you’ll end up worse off than if you had not rebalanced."

The article is an interesting read.  You can find it here:  Marketwatch.com "The Hidden Truth About Rebalancing Your Portfolio.