For Release: January 7, 2008 

DENVER, CO….January 7, 2008…Looking more often for opportunities to rebalance actually results in the need to rebalance less frequently than traditional methods, yet produces lower risk and better returns, according to research presented in the January 2008 issue of the Journal of Financial Planning, published monthly by the Financial Planning Association® (FPA®).

"By looking frequently and rebalancing only when needed, the average rebalancing benefits are shown to be more than double that with the more traditional annual rebalancing," writes Gobind Daryanani, CFP®, Ph.D., a managing director responsible for rebalancing research and products at TD Ameritrade in Jersey City, NJ.

Rebalancing provides two potential benefits. The first, and the most common reason for rebalancing, is to reduce risk. If some of the portfolio's asset classes stray too far from their target allocations, rebalancing them brings them back in line and reduces the portfolio's risk. The second potential benefit, Daryanani writes in his article "Opportunistic Rebalancing: A New Paradigm for Wealth Managers," is that rebalancing compels the investor to sell asset classes that have become overvalued (high) and buy more of the portfolio's asset classes that have become undervalued (low). Assuming these asset class allocations eventually revert to their mean, the investor boosts returns.

The problem with traditional rebalancing methods such as quarterly or annually, argues Daryanani, is that "the dates chosen for rebalancing are arbitrary, and thus we cannot possibly expect to catch the juiciest buy-low/sell-high opportunities."

To catch these juiciest opportunities, Daryanani proposes that investors "look" frequently to rebalance—say every two weeks—but rebalance only if allocations have strayed too far. That way, investors are more likely to catch high/low opportunities.

But Daryanani makes a further refinement of traditional rebalancing by using what he calls "range rebalancing to a tolerance band." Traditional rebalancing usually involves adjusting asset classes precisely back to their target benchmarks every three months, six months, or a year. But under the tolerance band approach, stray asset classes are rebalanced to within a set "tolerance band," not to the exact benchmark.

For example, say an asset class is 20 percent of the portfolio and it has a 10 percent rebalance band. This means it is rebalanced back to 20 percent only when it strays outside of a range of 18 to 22 percent. But say the rebalance band also has an additional 5 percent tolerance band. This means it's adequate to bring the asset to within a 19-21 percent target, not precisely to 20 percent. This tolerance band approach ultimately requires fewer trades to keep a portfolio balanced, according to Daryanani, thus cutting rebalancing expenses.

Daryanani studied a combination of rebalance bands, tolerance bands, and "look intervals" under several rolling periods (from 1992 to 2004). In general, Daryanani found that looking more frequently than traditional longer periods such as quarterly, combined with a 20 percent rebalance band worked best.

When trading costs were included, he found that looking often (say, daily) resulted in too many small trades, whereas looking every two weeks (10 trading days) produced superior results. "The benefits of opportunistic rebalancing far outweigh the costs associated with trading, taxes, and looking," concludes Daryanani.

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