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T
he 2016 calendar year and first quarter of 2017 proved well for the stock market, particularly domestic equities. While
the stock market experienced solid growth, the bond market saw dismal returns and the deviation between asset classes
returns was wide. The S&P 500 Index returned 11.96% in 2016 compared to the Barclays US Aggregate Bond Index
which gained 2.65%. Inherently, the S&P 500 Index is more risky than the Barclays US Aggregate Bond Index. In such market
conditions as seen in 2016, the strong overall performance of risky assets may have caused your holdings to drift away from
your target asset allocation. Now is a great time to critically review your account and determine if it is necessary to rebalance
your portfolio. As this newsletter explores the importance of rebalancing, please keep in mind that you can reach out to CBIZ
Retirement Plan Services as a resource to help guide you through the rebalancing process. CBIZ can assist with any questions
regarding your account and, as a Registered Investment Advisor, we offer specific investment advice based on your age, risk
tolerance, and any special circumstances.
Rebalancing in an up market
Throughout this quarter’s newsletter, we will refer to rebalancing as returning your portfolio to the original asset allocation by
selling the overweight assets and buying the underweight holdings. The table below illustrates a hypothetical example if you
had a portfolio that initially held 50% proportions to stocks and bonds, and how the overall allocation would have drifted over
the three-year period ending March 31, 2017:
Rebalancing
PAGE 2
Asset Class
Beginning Balance
Proportion
3- Year
Average Return
Ending Balance
Ending Proportion
Stocks
$ 5,000.00
50.00%
10.74%
(1)
$ 6,791.00
56.00%
Bonds
$ 5,000.00
50.00%
2.63%
(2)
$ 5,405.50
44.00%
Total
$10,000.00
$ 12,196.50
(1)
Three-year average based on S&P 500 Index
(2)
Three-year average based on Barclays U.S. Aggregate Bond Index
As the table illustrates, your portfolio’s original 50/50 asset allocation now holds more in stocks, increasing your risk
profile. If the above allocation was not changed and you continued to maintain a larger exposure to the stock market, any
drop in equities would translate to greater losses than intended. If this study were to be extended out further to a five- or
ten-year time period, you could potentially stray even further from your target allocation than what is depicted above.
If you find yourself in this situation, the appropriate next step is to rebalance your portfolio back to the original allocation.
In this particular case, you would sell stocks to purchase bonds in order to get back to your 50/50 target. The table below
illustrates the mechanics of this transaction.
Asset Class
Beginning Balance
Proportion
Desired Proportion
Buy / Sell
Ending Balance
Stocks
$6,791.00
56.00%
50.00%
-$693.00
$6,098.00
Bonds
$5,405.00
44.00%
50.00%
$693.00
$6,098.00
Total
$12,196.00
$12,196.00
Continued on page 3
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