Finding the Right Balance; Seasonal investing and portfolio rebalancing

The idea of seasonal investing is based on the premise that through the study historical data of past market behaviour, investors can make predictions on how markets will perform in a given time of the year. Seasonality is about anticipating how the market will behave in a given time of year and taking a position before the change occurs (e.g., if we know that December and January are usually strong then we might consider investing in November to make sure we hold investments in the following months). Data has shown that these seasonal anomalies may offer an advantage to investors by timing when to make decisions to buy and/or sell.
However, one doesn’t have to work too hard to find exceptions to the rules, or even cases where well-known seasonal adages contradict each other (should one “sell in May and go away” or invest for the “summer rally”?).

One seasonal habit that every investor should adhere to is regularly rebalancing your portfolio to match your desired asset allocation. Readjustment of your portfolio is needed, independent of the season, to restore its original balance and re-align asset allocation. If your investment goal hasn’t changed, your portfolio’s mix shouldn’t, either regardless of market forces.
The composition of a portfolio will change naturally as components will have different returns for any number of reasons. Those investments that have done well will naturally begin to take up more of a portfolio; those that haven’t done as well will take up less.

If left unchecked, a portfolio may become unbalanced or overly concentrated in a certain stock or asset class. Rebalancing is primarily about risk control and also making sure a portfolio isn’t overly dependent on the success (or failure) of a single component of the entire portfolio.
Investors can’t predict what asset class, sector or investing style is going to rule the investment world next year, nor can they foresee how rapidly things might change. Regularly rebalancing helps reap the full rewards of diversification. Trimming back on a winner allows you to buy a laggard, protect your gains, and position your portfolio to benefit from a change in the market’s favourites.

A common approach is to rebalance when allocation to a certain asset class, sector or investing style moves five percent or more from the target. But a simpler approach is to calendar it and make the changes on a predetermined date. And simpler is better since it’s important that an investor will actually follow through and do it.
At Purpose, regular and scheduled rebalancing is one of the core tenants we’ve built our funds around. All of our funds feature a systematic, disciplined, rules-based investment strategy that ensures the desired asset allocation is maintained over time.

When done dutifully and regularly, seasonal rebalancing can be an important element that contributes to the long-term success to a portfolio.

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