There are three main reasons why rebalancing generates long-term added value:
1. Risk management
The financial markets fluctuate and regularly show price exaggerations. Without rebalancing, the proportion of high-risk investments increases in such phases, which means that portfolio risk as a whole no longer corresponds to the client’s risk profile. Automatic rebalancing guarantees that price fluctuations will result in only minor deviations from the defined target strategy.
2. Anticyclical behavior
Automatic rebalancing tends to lead to countercyclical action. During continuous high phases, more risky investments tend to be dismantled and, conversely, rather built up in continuous low phases. Over a longer period of time, this improves the ratio of return to risk.
3. Rule-based creation
The average investor is unable to correctly time the market. Rule-based investment in the form of automatic rebalancing helps to avoid hasty and emotional investment decisions.