The Discipline of Portfolio Rebalancing in ETF Management
Portfolio rebalancing stands as a cornerstone of disciplined investment strategy, ensuring that market fluctuations do not derail an investor's intended risk profile. Over time, assets like equities tend to outperform lower-risk instruments such as bonds, leading to unintended deviations from the original allocation. For ETF investors, this drift can introduce unanticipated risks, making periodic rebalancing essential.
The mechanics are straightforward: a 60/40 stock-to-bond ratio that balloons to 70/30 during a bull market exposes the investor to heightened volatility. Correcting this drift preserves the portfolio's alignment with long-term goals. Fixed-income managers, for instance, may find themselves out of their depth if equities dominate the allocation, underscoring the need for vigilance.
