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One of the primary ways for an individual investor to gain a competitive advantage relative to the markets is to have a long term time horizon. When viewed through this lens, investors with a disciplined long term approach can benefit from short term market fluctuations systematically. An important way to benefit from market run-ups and sell-offs is through a process called rebalancing. Each client of Meritas has a customized Investment Policy Statement (IPS) that includes an asset allocation designed to meet their specific goals, needs and tolerance for risk. The equity, fixed income, and specialty funds in each portfolio have a tendency to perform differently from each other. This divergence of short term performance is what provides the opportunity for effective rebalancing. Here’s a simplified example to illustrate point. Let’s say that a client has a 30/30/40 target portfolio, 30% bonds, 30% stocks, and 40% specialty. Then, a selloff in the equity market causes the actual portfolio weightings to diverge from the target, and become 35/20/45. At that time, Meritas would expect to sell 5% of the bond positions and 5% of the specialty positions and add 10% to the stock positions in order to bring the actual portfolio back into balance with the target in the IPS. By following this rebalancing discipline, the positions which have outperformed are trimmed, and the proceeds are added to the asset class(es) that have underperformed. Taking the long term view with this disciplined approach is a way of implementing one of the first rules of investing, to buy low and sell high.

Market-Recap

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