Yes, rebalancing makes sense, even (perhaps especially) in a crisis.
Obviously there’s a lot going on right now. Is this anytime to worry about small stuff like rebalancing? We do not wish to minimize the gravity of the situation, but the answer is yes. You can’t change the market or eliminate COVID-19.1 But you can make your clients better off, if only a little, by rebalancing in a timely and efficient manner.
Let’s start with loss harvesting. What, you might think, is the point of loss harvesting now? Capital gains taxes are possibly the least of your clients’ current worries. But that’s today. Markets will recover and when they do the losses you realize now will be valuable to your clients. This isn’t just hypothetical. In 2008, we saw our clients systematically harvest losses in their accounts as the market dropped. Their pre-tax performance was not affected, but they built up reserves of loss carryforwards for their clients that were useful in 2009 and 2010. And it’s a benefit that’s basically free. With modern rebalancing tools, ongoing loss harvesting takes virtually no extra work, and it has negligible effects on pre-tax returns.
More importantly, rebalancing matters because it allows you to maintain control of the risk of your portfolios. We don’t know whether you should increase or decrease exposure to equities. But we do know that you should be able to do either, as you see fit. Leaving portfolios alone by choice is defensible, but leaving portfolios alone because you have no effective mechanism for rebalancing at scale is not.
We’ve been talking to clients about their responses to COVID-19. Beyond the physical well-being of their clients and themselves, their concern has been making sure that their clients remain financially secure and aren’t burdened by financial worries on top of everything else. At one firm we spoke with, they’ve already called every client — twice. They want to deliver a message of being on the job and in control. And, yes, as they deal with more important stuff, they’re steadily rebalancing and harvesting losses in the background.
1 If you can, you may want to stop reading this and get back to work.