Over time, the market itself will move a portfolio’s asset allocation away from its intended mix. When asset allocation changes, so does the portfolio’s risk and return profile. A 60/40 equity/fixed income portfolio built six months ago will likely look very different today.

An advisor is then left with one of two choices, let the portfolio drift or rebalance it. A drifting portfolio may be advantageous, you may be lucky or you may experience a scare. Rebalancing a portfolio, on the other hand, is a disciplined approach with which many advisors are controlling the risk of their clients’ portfolios. In doing so, they are disaggregating skill from luck. Clients will take luck, yet they will pay for skill.

So what does an advisor’s rebalancing approach look like? Well, it depends on the advisor. Some will employ a threshold rebalance to a range of 5 – 10%, while some may engage in an annual periodic rebalancing strategy. Several different rebalancing strategies exist and there is a lot of research on the pros and cons of each. Torture the research enough and it will tell you what you want to hear. Bottom-line: the research will show that choosing one strategy, essentially any of them will be better than letting a portfolio drift.

Advisors are increasingly using index ETFs for their rebalance strategies due to their transparency, low cost and ease of use. Index ETFs are also the tightest proxy for any and all asset classes. A 60/40 mix that has beomce a 70/30 due to market movements will require two trades of the index ETFs to snap the portfolio back in line.

A good scare is worth more than good advice, it has been said. It has been shown that great advice and discipline prevent such scares.