Yes, rebalancing makes sense, even (perhaps especially) in volatile markets.
Obviously there’s a lot going on right now. Is this any time to worry about small stuff like rebalancing? We do not wish to minimize the gravity of the situation, but the answer is yes. You can’t change the market.1 But you can make your clients better off, if only a little, by rebalancing in a timely and efficient manner.
Let’s start with loss harvesting. What, you might think, is the point of loss harvesting now? Capital gains taxes are possibly the least of your clients’ current worries. But that’s today. Markets will (likely) recover and when they do the losses you realize now will be valuable to your clients. This isn’t just hypothetical. In March 2020 we saw our clients systematically harvest losses in their accounts as the market dropped. Their pre-tax performance was not affected, but they built up reserves of loss carry forwards for their clients that were useful later in the year. And it’s a benefit that’s basically free. With modern rebalancing tools, ongoing loss harvesting takes virtually no extra work, and it has negligible effects on pre-tax returns.
More importantly, rebalancing matters because it allows you to maintain control of the risk of your portfolios. We don’t know whether you should increase or decrease exposure to equities. But we do know that you should be able to do either, as you see fit.
Leaving portfolios alone by choice is defensible, but leaving portfolios alone because you have no effective mechanism for rebalancing at scale is not.2
1 If you can, you may want to stop reading this and get back to work.
2This post is an update of one we penned during the market crisis in 2020. While the context of why the market is volatile is different, the message is the same.
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