Portfolio rebalancing is a crucial but perhaps underappreciated aspect of multi-asset portfolio management, whose importance was highlighted by the extreme market volatility of recent quarters. The rebalance policy supports larger risk and return objectives captured in a portfolio’s strategic and tactical asset allocation targets, which incorporate an asset manager’s alpha strategy. However, rebalancing involves tension between transaction costs and tracking error, or how closely the portfolio adheres to its targeted allocation. These costs rise exponentially in times of market stress. As a result, a robust rebalance policy must account for market regime. In most environments, where transaction costs are low and markets are highly liquid, narrow rebalance bands strike a good balance between cost and risk control. But when volatility spikes, costs rise and liquidity evaporates, wider bands become preferable. Ultimately, we believe that rebalance guidelines are preferable to hard and fast rules, and that active managers and traders can add significant value precisely when volatility spikes.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks from Facebook, Twitter or any third-party website. Facebook, Twitter and LinkedIn are registered trademarks of their respective owners.