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In my area, my employer offers a managed retirement savings plan with generous matching contributions.

The plan offers very limited control over investment choices (a narrow range of abstract mutual funds, each fund targetting a very specific investor profile), and also offers an ongoing "rebalancing" service - where, on a quarterly or semi-annual basis, the investment portfolio is automatically rebalanced to reflect my guidelines in terms of % investment per mutual fund.

In a situation like this, is it worth checking off the "automatic rebalancing" box?

Does anyone have some math running over historical data, showing what the costs vs. benefits for such automatic rebalancing might look like (for educational purposes - i can adjust the math to match my personal specifics, as needed)?

Bob Baerker
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blueberryfields
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1 Answers1

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Most advisors will be an advocate for "rebalancing." This advocacy is generally based on modern portfolio theory (same theory responsible for "the 4% rule"). The theory's idea is that rebalancing readjusts the return/risk profile of the "investment" to its original risk/return profile.

The fear is, if one holding of the portfolio outperforms the rest and becomes "too valuable" compared to the rest of the portfolio, the entire portfolio's performance is then too dependent on this one holding. Rebalancing would sell off some of this "outperformer" to purchase more of the "underperformers."

The real question is whether or not this "automatic rebalancing" causes you additional management fees or transaction costs.

Douglas Denhartog
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