For every investment organization, portfolio management plays a key role in the implementation and execution of any strategy. Portfolio management can mean many things. In our opinion, one of the most critical activities involved in portfolio management is rebalancing. Rebalancing is a term used to describe the trading activity that is meant to bring a portfolio’s various asset classes in-line with its target. For example, let’s assume that a portfolio’s target allocation is supposed to be 60% stocks and 40% bonds. Hypothetically, over the course of a year, the stock market does well and the bond market return is slightly negative. At the end of the year, that same 60/40 portfolio may actually be allocated closer to 65% stocks and 35% bonds base, thus creating a variance to the target of 5% in both asset classes. Rebalancing trades would simply look to realign the account back to its target allocations. This would involve selling 5% of the stock allocation and adding 5% to the bond allocation.
