Should Portfolios Be Rebalanced?

I am quoted in a Washington Post article about the advantages and disadvantages or rebalancing a portfolio.

David Kass, a professor of finance at the University of Maryland, said most professional investors like Warren Buffett do not rebalance, but it makes sense for the rest of us. Kass even recommends rebalancing for a local nonprofit, where he sits on the investment committee.

“For most people and nonprofit institutions, rebalancing makes sense as a control for risk,” Kass said, pointing out that the Dow Jones industrial average declined 55 percent between October 2007 and March 2009. Average investors may not have the stomach for that kind of drop, particularly those closing in on retirement.

“Each investor or institution has his or its degree of risk tolerance or risk aversion,” Kass said. “Even though a buy-and-hold strategy of investing in equities is likely to outperform a rebalancing strategy between stocks and bonds in the long run, risk is better controlled in the short run.”

“I personally do not rebalance,” he said. “Certainly, Warren Buffett does not. For most individuals and institutions, it’s a wise idea to basically control the amount of risk in the overall portfolio by setting targets for the percentage of your portfolio that you would want in equities, in debt securities or bonds, and in cash, certificates of deposit, Treasury notes and Treasury bills.”

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