Opportunistic rebalancing is similar to opportunistic asset allocation and essentially means rebalancing an investment portfolio as opportunities present themselves, without sticking to rigid preset asset allocation percentages or limitations.
Traditional Balanced Portfolio
A portfolio balance should take into account an investor's goals, resources, skill and risk tolerance. Some investors and investment advisers believe that there is an optimal investment mix for each situation, which they apply when constructing personalized investment portfolios. Percentages remain constant as long as an investor's situation does not change. A portfolio is periodically rebalanced based on investment performance to maintain the preset percentages.
When an investment opportunity presents itself, an investor must have funds available to take advantage of it. With a permanent asset allocation, he may not be able to take advantage of an emerging opportunity if he is fully invested. To free up funds, he would need to sell something in his portfolio and "disrupt" a carefully established balance. Such a rebalancing, necessitated by an investment opportunity, would be "opportunistic."
Drawbacks of Fixed Asset Allocation
The basis for asset allocation is the theory that assets with limited correlation enhance overall stability: An upward move in the price of one asset offsets or softens the impact of a downward move in another. The problem with a fixed approach is that superior performance is achieved by concentrating capital in outperforming assets, not by broad diversification across the board. A fixed-asset allocation may limit portfolio performance by forcing an investor to stay in underperforming assets while ignoring an investment opportunity.
Advantages of Opportunistic Asset Allocation
To take advantage of new emerging opportunities, an investor must be flexible in his portfolio mix. For example, at some point in the economic cycle, junk bonds can outperform other types of bonds and even stocks. An opportunistic asset allocation (and rebalancing) would mean that an investor would sell other assets to increase his position in junk bonds. He may do so gradually, selling and adding in steps, as market conditions warrant, but his rebalancing would be opportunistic, or unplanned. He may still hold other assets, but the percentages would be constantly changing, dictated by market opportunities. As junk bond returns moderate, the investor would gradually take his profits and start repositioning the cash elsewhere. If there are no compelling investment opportunities at the moment, an investor might stay in cash for an extended period of time.
- "The All-Season Investor"; Martin J. Pring; 1992
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