Some investors use a set-it-and-forget-it approach to their portfolios, but there are times when the asset mix may need to be recalibrated to achieve one’s goals. Here, Franklin Templeton Multi-Asset Solutions’ Gene Podkaminer and Wylie Tollette discuss the importance of rebalancing one’s portfolio, especially during times of market turmoil, and how different types of investors can accomplish the task.

During normal times, rebalancing a portfolio is a relatively mundane exercise, an activity that can be performed succinctly and often mechanically. But when markets gyrate, as they have recently, an investor’s approach to rebalancing becomes much more complex. And unlike many other aspects of investing, rebalancing is somewhat of a dark art with few universally accepted rules. Ultimately, rebalancing is the feedback loop between your actual portfolio and the carefully crafted asset-allocation ranges you devised in calmer times.

Over the past several months, we have observed price declines in many assets considered riskier (such as the many flavors of equity), coupled with mixed performance or even appreciation in assets considered less risky, such as bonds. Of course, the prices of investments which aren’t marked-to-market, such as appraisal-based private equity and real estate, may lag their public-market peers by several quarters, but economically investors should expect those assets to move alongside their public-market cousins.

What is an investor to do when their thoughtfully constructed asset allocation comes in contact with the financial aftermath of COVID-19? Allow it to drift? Micro-manage the investments to precisely match target ranges? Perhaps a bit of both?

We’ve observed asset allocators adopt a wide range of responses to these questions, with some allowing portfolios to drift hands-off while others aggressively true up to ranges. Many institutional and professional investors formally document their portfolio weights, while individuals may take a less formal approach. But that doesn’t change the calibration of a mix of assets to a certain risk tolerance, whether expressed explicitly as the Greek letter λ (lambda) in an optimizer, or implicitly as a static proportion of stocks vs. bonds for those less versed in Greek. So, allowing a portfolio’s allocation to unintentionally drift implies that the risk level has also drifted away from the target.