Rebalancing

A portfolio structured around compensated risk factors is organized around polar risk dimensions. This offers advantages over other investment strategies when it comes to rebalancing a portfolio back to its intended structure.

Though not a perfect inverse relationship nor predictable, periods when large stocks outperform tend to alternate with periods when small stocks outperform. The same is true for growth and value stocks. Portfolio performance varies when risk factors move in and out of favor. Movements significant enough to require trading tend to vary systematically, which brings clarity and purpose to the process of rebalancing.

A portfolio built around the skill or charisma of active managers has holdings that vary more randomly across risk dimensions and becomes harder to rebalance in a logical way. The downside of this practice is that it encourages investors to chase performance and depend on the randomness of speculation as the source of their success. With an actively-managed approach, rebalancing to a desired portfolio structure is pointless.

Purpose Wealth conducts rebalancing trades when it makes sense to do so. This "contingent" rebalancing process relies upon a triggering event, such as account deposits/withdrawals or when asset class positions deviate significantly from their intended targets. Our primary consideration is that the benefits of rebalancing must outweigh the costs.