In May we trimmed equities across most portfolios and moved the proceeds into bonds. Several clients asked the obvious question: why sell the thing that is working?
It is a fair challenge, and the answer is not that we expect equities to fall. We have no view worth acting on there. The answer is that we were no longer holding the portfolio we agreed to hold.
Drift is a decision you did not make
A portfolio set at 60% equities and 40% bonds does not stay there. After a strong run in equities it might sit at 70/30. Nobody decided to take more risk — but more risk is exactly what is now being taken, and it is being taken at precisely the point when valuations are higher and the cushion is thinner.
Rebalancing is not a market call. It is the refusal to let the market quietly rewrite your risk budget.
The discomfort is real. Selling what has done well to buy what has not feels like a mistake in the moment, every single time. That feeling is not information.
What the arithmetic says
Two things happen when you rebalance by rule.
Risk stays where you put it. This is the main point and the one that matters most. A 70/30 portfolio held into a downturn falls further than the 60/40 the plan called for, and it falls further at the exact moment the client’s capacity to tolerate it is lowest.
You systematically sell high and buy low. Modestly, mechanically, without needing to forecast anything. Over long periods this has tended to add a little return as well as controlling risk — but the return is the bonus, not the reason.
How we do it
- Bands, not dates. We rebalance when an allocation drifts more than five percentage points from target, rather than on a fixed calendar. Calendar rebalancing trades when nothing has happened and ignores the moments when a great deal has.
- Cash flows first. New contributions and withdrawals are directed to the underweight and overweight assets respectively, which does much of the work without a single transaction.
- Tax before trades. Inside ISAs and pensions we rebalance freely. In taxable accounts we look at the gain first, use the annual exemption, and sometimes accept a little more drift rather than trigger an unnecessary bill.
The part that requires discipline
None of this is intellectually difficult. What is difficult is doing it in the specific month when doing it feels most foolish — which, by construction, is always. That is why it is written into the investment policy and executed against bands rather than left to a judgement call in the room.
An invitation
Would it help to talk this through?
An hour, at our cost, applied to your own numbers rather than an illustration.
Request an audience