First, rebalance. Let's assume someone's starting allocation is 60% equities, 38% fixed income, and 2% cash. Over some period of time the market moves up causing the allocation to naturally change to 70% equities, 25% fixed income, and 5% cash. At that point the portfolio strategist might want to return the asset mix back to its original target allocation percentages. That would be considered a rebalance. Periodic rebalancing to the target asset mix controls risk and promotes disciplined selling of winners and purchasing laggards or in other words buying low and selling high.


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Reallocating on the other hand is completely different. In this scenario, there is no target allocation to maintain. For example, let's say we start with the same allocation as in the example above of 60% equities, 38% fixed income, and 2% cash and the market has just experienced a significant decrease in value. The portfolio strategist might decide to significantly change their allocation in order to try to take advantage of the recent decline with a new allocation of 70% equities, 25% fixed income, and 5% cash. This would be a reallocation. The portfolio strategist is making a change to the allocation by increasing exposure to equities in order to try to capitalize on their current outlook anticipating a rebound.

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It can also work in reverse where they might change their allocation to be much more defensive if they think the current market is overvalued. Using the example above, suppose the rebound occurs. The portfolio strategist may now want to reduce risk and bring the allocation down to 35% equities, 50% fixed income, and 15% cash if they feel the market may go back down. Suppose then the market does fall. The portfolio strategist may now want to reallocate to increase market exposure in anticipation of the next rebound. Either way, when a portfolio strategist changes their allocation based upon their outlook it is called a reallocation.

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As we have seen in the past, secular bear markets can last many years. What you see in the chart below is the last complete secular long-term bear market of the DOW Jones Industrial Average from 1966- 1982. While there is a lot of data here, I merely want to emphasize two key points.

First, even though one might be in the middle of a long-term bear market, I believe there is still opportunity to build wealth by "rowing” towards your goal. For example, let's look at three of the six cyclical or short-term bull markets within this one secular long-term bear market. As you can see, in shorter periods of time the markets do rise. These cyclical markets would have been good opportunities to reduce risk when the market was high and increase market exposure when it was low. During the same secular bear market period of 1966 to 1982 when looking at the S&P 500, there were actually more up days than there were actual down days. So even though you might be in a long-term bear market there is still upside opportunity, I believe you just need to be employing an investment strategy that can take advantage of it. Which brings me to the second point.

Secular bear markets are a great time to try to avoid risk. To help demonstrate this point, let's look at the entire 1966 to 1982 period. From start to finish the bear market lasted just shy of 16 and a half years and over that period of time the price decrease in the Dow Jones Industrial Average was almost a negative 22%. I think that it is clear that avoiding risk would have been wise during this period. But unfortunately if you merely bought and held over that period of time you didn't really avoid any of the risk. If your portfolio was down over 20% 15 years later, how would you feel? Perhaps you are feeling this way given the last 10 years market performance where we are at the same place 10 years later.

How many investors at that time would have said, buy and hold was dead? I suspect many investors were feeling this way as they are now. Well was it? NO. Actually 1982 was the perfect time for investors to start over-weighting a buy and hold strategy as it was the start of the great bull market of 1982 – 2000, which is really the point of this explanation.

I believe as an investor, you need access to multiple types of asset allocation approaches that give you the tools to navigate volatile markets such as these. While buy and hold is one type, there are the other approaches as well. In particular there are approaches that are specifically designed to avoid risk versus keep up with the market. This is why rebalancing and reallocating strategies should be utilized.

Rebalancing and reallocating can occur at the portfolio strategist level or for the overall portfolio as a whole. For example, a Tactical Unconstrained^sm portfolio strategist may choose to reduce equity exposure anticipating a market decline or increase equity exposure to take advantage of an anticipated rise in the markets. As your Investment Advisor, I may see it necessary to increase or decrease overall market exposure by rebalancing or reallocating your entire portfolio among the four asset allocation approaches.

Rebalancing and reallocating are tools to help you "sail” and "row” towards your goal depending upon the market environment.

Your portfolio will be monitored on an ongoing basis by your investment team and you will receive periodic reports on your progress. Go on to Reporting and Monitoring to learn more.