Is It Time to Rebalance Your Asset Allocation?


If you are a smart and savvy saver, you have likely been contributing to your retirement portfolio since your early working days. From the time you first set up your retirement account, your personal and financial situation has probably undergone many changes. But what might these changes mean for your longer-term investment focus? More specifically, how might such milestones change the way you view your asset allocation strategy—your mix of stocks, bonds, cash and other securities? To answer these questions, let us first explore two distinct approaches to asset allocation—strategic and tactical—and see how to think about both during periods defined by major life changes.

Asset Allocation Strategies: Strategic vs. Tactical

We believe your asset allocation is the single biggest determinant of your investing success. This is because over time and on average, securities tend to act like the category they belong to. For example, if you hold cash, it doesn’t much matter whether you own physical dollar bills or are invested in a money market account, the value of cash-like assets will likely have less market volatility and less long-term growth prospects than other security types, like stocks or bonds. Given the importance of the asset allocation decision, we believe it’s essential to understand the different ways to think about this concept.

Strategic Asset Allocation. This refers to your “core” asset allocation—the mix of security types you have based on your goals, objectives and personal financial situation. Your strategic asset allocation should take into account many factors specific to you—including desired portfolio growth, income or cash flow needs, how long you need your money to last and more. Importantly, we believe this mix should rarely change. Of course, your assets will likely change in value over time at different rates. When the returns of a single asset class outperform others and changes your mix of securities significantly, we believe you should rebalance your assets. This is also true at the sub-asset allocation level. For instance, you may be invested in stocks across different countries and sectors. If your strategic allocation says you should typically allocate 10% of your investments toward Industrial stocks, and that sector experiences a boom and begins generating returns that swell the allocation to 20%, you may decide to reset the portfolio selling some stock in that sector until it again represents just 10% of your portfolio.

As this example illustrates, rebalancing your portfolio entails moving your assets back to their original allocation when they deviate too far from the original mix. Strategic asset allocation speaks to a longer-term investing approach and should only change if your goals or personal situation change significantly.

Tactical Asset Allocation. Tactical asset allocation means shifting the types of assets or areas within assets that make up your investment portfolio to take advantage of areas in the market you think will perform better as market conditions change. Since asset allocation changes should be rare, tactical decisions usually mean investing less or more in different areas within assets, such as different countries or sectors. We refer to this decision as the sub-asset allocation decision. For instance, if you’re invested in stocks and believe Technology stocks will do better than others in the near-term, you may decide to invest more in Technology stocks and less in other sectors.

Why Do Some Investors Shift Their Sub-Asset Allocation? 

No one country, sector, or investment style will perform best at all times. Market conditions change frequently, and shifting your emphasis from one type of stock to another, when done correctly more often than not, can add value to a portfolio over time. As Exhibits 1 and 2 below illustrate, the performance of US vs. foreign equities and large-cap vs. small-cap equities is cyclical.

Exhibit 1: US vs. Non-US Leadership Rotation

Source: FactSet, as of 4/7/2017. 12-month rolling MSCI USA Total Returns minus 12-month rolling MSCI World Ex-USA Total Returns from 12/31/1982 – 3/31/2017. The MSCI USA Index tracks large and mid-cap US stocks represented in the MSCI All Country World Index. The MSCI World Ex-USA Index tracks country index returns for 22 developed markets.

Exhibit 2: Large Cap vs. Small Cap Leadership Rotation

Source: FactSet, as of 4/7/2017. 3-year rolling Russell 1000 Total Returns minus 3-year rolling Russell 2000 Total Returns from 12/31/1982 – 3/31/2017. The Russell 1000 Index consists of the 1000 largest companies in the Russell 3000 Index. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index.

Of course, making a tactical portfolio change won’t always necessarily work in your favor. In order to make tactical changes that help you perform better than other investors over time, you typically need to interpret widely known information differently from the crowd. This is easier said than done. Many investors have a host of biases that work against their investing success—making appropriate tactical asset allocation decisions involves questioning and managing those biases.

Our Advisers Can Help

The financial planning process at Fisher Investments starts with a detailed understanding of your longer-term investment goals. This drives the strategic asset allocation we provide you. We then make tactical decisions within your portfolio to take advantage of areas of the market we believe will do better over the coming months. You’ll also have a dedicated point of contact at the firm who reviews your individual situation with you and keep you abreast of important developments related to markets and your portfolio. Give us a call to learn how we can help with your asset allocation plan.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.