How well do your clients understand the benefits of portfolio rebalancing?

22 April 2020 | Portfolio construction


 Remove  Save

Many advisers recognise the value of periodic portfolio rebalancing to maintain their clients' target asset mix. After all, asset allocation has been shown to be the most important factor in determining long-term investing success.1

Yet clients often express resistance to the idea of rebalancing their portfolios. One of their most common objections: why sell the winners and buy more of the assets that have less impressive returns? Why not do the precise opposite to reap maximum returns?

To help address those questions, we have pulled together some data that might be useful in explaining the consequences of portfolio drift and the benefits of periodic portfolio rebalancing.

Portfolio drift

Asset allocation will drift gradually during normal market cycles, but this effect can become more acute during times of increased volatility. Given the current market environment, clients may be more receptive to the risk-mitigating benefits of portfolio rebalancing.

The below chart shows the impact of portfolio drift over the long-term.  The initial allocation for both portfolios is 60% global equity and 40% global bonds. The rebalanced portfolio, as illustrated below, is returned to its target allocation at the end of each June and December, whereas the non-rebalanced portfolio drifts to more than 80% equity over time – greatly changing the risk profile of the portfolio.

Changes in stock exposure for a rebalanced portfolio and a 'drifting portfolio',

January 1960–December 2019

Source: Vanguard calculations, based on data from Thomson Reuters Datastream and Bloomberg Barclays.
Notes: The initial allocation for both portfolios is 60% global equity and 40% global bonds. The rebalanced portfolio is returned to this allocation at the end of each June and December. Global equity is defined as the MSCI All Country World Investable Market Index, GBP un-hedged. Global bonds are defined as the Bloomberg Barclays Global Aggregate, hedged to sterling. Returns are in GBP with income reinvested


Historically, higher-return assets have brought increased risk

The objective of portfolio rebalancing is to minimise risk rather than maximise return, which can be difficult to extol when markets are rising. In the current environment, the message might be a little easier to convey.

The chart below shows the best, worst and average returns for different stock/bond allocations over more than a century. Higher expected return comes with heightened risk, which over time can be mitigated by regular rebalancing to realign with an individual's risk appetite.

Best, worst, and average returns for various stock/bond allocations, 1901-2019

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Notes: Reflects the maximum and minimum calendar year returns, along with the average annualised return, from 1901-2019, for various stock and bond allocations, rebalanced annually. Equities are represented by the DMS UK Equity Total Return Index from 1901 to 1969; thereafter, equities are represented by the MSCI UK Index.   Bond returns are represented by the DMS UK Bond Total Return Index from 1901 – 1985; the FTSE UK Government Index from Jan 1986 – Dec 2000 and the Bloomberg Barclays Sterling Aggregate Index thereafter. Returns are in sterling, with income reinvested, to 31 December 2019.
Source: Vanguard


Over time, different asset classes have produced different returns and, correspondingly, different levels of volatility.

More portfolio return consistency through balance

Annual returns by asset class (%), from the highest to the lowest, 2009–2019

Past performance is not a reliable indicator of future results.
Source: Vanguard calculations, using data from Barclays Capital and Thompson Reuters Datastream.  Global equity  is defined as the FTSE All World Index,  North America equity as the FTSE World North America Index, Emerging market equity as the FTSE Emerging Index,  Developed Asia equity as the FTSE All World Developed Asia Pacific Index,  European ex-UK equity as the FTSE All World Europe ex-UK Index, UK equity as the FTSE All Share Index, UK government bonds as Bloomberg Barclays Sterling Gilt Index, UK index-linked gilts as Bloomberg Barclays Global Inflation-Linked UK Index,  UK investment grade corporate bonds as Bloomberg Barclays Sterling Corporate Index, Hedged global bonds as Bloomberg Barclays Global Aggregate Index (hedged in GBP), 60 equity, 40% bonds portfolio represented by LifeStrategy 60% Equity Fund performance.  Returns are denominated in GBP and include reinvested dividends and interest. Performance shown is cumulative and includes the reinvestment of all dividends and any capital gains distributions. The performance data does not take account of the commissions and costs incurred in the issue and redemption of shares. Basis of fund performance NAV to NAV. Please be advised that the performance of the LifeStrategy 60% Equity Fund from 1/1/2008 to 23/06/2011 is simulated. Simulated performance figures do not represent actual fund activity, and may not take account of relevant economic and market factors impacting actual fund performance. Simulated and actual past performance is not a reliable indicator of future results.


Advisers have a range of options with which to approach rebalancing:

Time only—rebalancing on a set schedule, such as daily, monthly, quarterly or annually.

Threshold only—rebalancing when a target asset allocation deviates by a predetermined percentage, such as 1%, 5% or 10%.

Time and threshold—rebalancing on a set schedule, but only if a target asset allocation deviates by a predetermined amount, such as 1%, 5% or 10%.

Many advisers use rebalancing software to eliminate any uncertainty over which option might yield the best outcome. Otherwise, the chosen approach can simply hinge upon your practice's preference.

Gaining buy-in from clients for strategies such as rebalancing can be as simple as providing them with a "why" that answers their questions or satisfies their objections. For instance, they may want to know more about your firm's rebalancing methodology—what is the process, how often does it happen, does it usually result in significant capital gains taxes or transaction costs and how significant a risk reduction can they expect in return?

Rebalancing can also be combined with and complement other strategies, such as tax-loss harvesting. Vanguard research shows that advisers can add appreciable value over time, through activities such as rebalancing and behavioural coaching in general2.

In addition, Vanguard research has determined that none of the major rebalancing approaches holds a distinct or enduring advantage over the others. Therefore, the most important consideration is for advisers to apply rebalancing to client portfolios in a consistent and disciplined manner to give clients the best chance of reaching their long-term financial goals.


Rebalancing: The diversification defence

Share this piece with clients to show how rebalancing a diversified portfolio can help dampen volatility while still delivering a level of return that can help clients meet their long-term financial goals.

Download client guide

How rebalancing reduces your clients' risk

Share this piece with your clients to help them understand how a well-planned rebalancing strategy can be used to help dial down risk in their portfolios.

Download client guide


1 Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, 1995. "Determinants of portfolio performance." Financial Analysts Journal 51(1):133–8. (Feature Articles, 1985–1994.)
2 Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, Yan Zilbering, and Donald G. Bennyhoff, 2019. Putting a value on your value: Quantifying Vanguard Advisor's Alpha®. Valley Forge, Pa.: The Vanguard Group.



This document is directed at professional investors and should not be distributed to, or relied upon by retail investors. This document is designed for use by, and is directed only at, persons resident in the UK.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Simulated and past performance are not reliable indicators of future results.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.

Investments in smaller companies may be more volatile than investments in well-established blue chip companies.

The fund(s) may invest in financial derivative instruments that could increase or reduce exposure to underlying assets and result in greater fluctuations of the fund's Net Asset Value. Some derivatives give rise to increased potential for loss where the fund's counterparty defaults in meeting its payment obligations.

The Vanguard LifeStrategy Funds may invest in Exchange Traded Fund (ETF) shares. ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.

Important information

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The opinions expressed in this article are those of individual speakers and may not be representative of Vanguard Asset Management, Limited.

The Authorised Corporate Director for Vanguard LifeStrategy® Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard LifeStrategy® Funds ICVC.

For further information on the fund’s investment policy, please refer to the key investor information document (“KIID”). The KIID and the Prospectus for these funds are available from Vanguard Asset Management, Limited via our website

London Stock Exchange Group companies include FTSE International Limited ("FTSE"), Frank Russell Company ("Russell"), MTS Next Limited ("MTS"), and FTSE TMX Global Debt Capital Markets Inc. ("FTSE TMX"). All rights reserved. "FTSE®", "Russell®", "MTS®", "FTSE TMX®" and "FTSE Russell" and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license. All information is provided for information purposes only. No responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication. Neither the London Stock Exchange Group companies nor any of its licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Indexes or the fitness or suitability of the Indexes for any particular purpose to which they might be put.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS® is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited ("BISL") (collectively, "Bloomberg"), or Bloomberg's licensors own all proprietary rights in the Bloomberg Barclays Indices. 

The products are not sponsored, endorsed, issued, sold or promoted by “Bloomberg or Barclays”. Bloomberg and Barclays make no representation or warranty, express or implied, to the owners or purchasers of the products or any member of the public regarding the advisability of investing in securities generally or in the products particularly or the ability of the Bloomberg Barclays Indices to track general bond market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the products with respect to any person or entity. Bloomberg’s only relationship to Vanguard and the products are the licensing of the Bloomberg Barclays Indices which are determined, composed and calculated by BISL without regard to Vanguard or the products or any owners or purchasers of the products. Bloomberg has no obligation to take the needs of the products or the owners of the products into consideration in determining, composing or calculating the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the products to be issued. Neither Bloomberg nor Barclays has any obligation or liability in connection with the administration, marketing or trading of the products.

The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. The prospectus or the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Issued by Vanguard Investments Switzerland GmbH.

© 2020 Vanguard Asset Management, Limited. All rights reserved.
© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.


 Remove  Save