The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Chapter 20

Monitoring and Rebalancing Taxable Portfolios

All movements go too far.

—Bertrand Russell

The traditional techniques employed in the monitoring of investment performance and in the rebalancing of investment portfolios arose in the institutional world, where such matters are very clear cut. But institutions are quite different from families. In the first place, institutions are typically engaged in a relative performance game. If the S&P 500 is down 28 percent and the Widget Pension Plan's large-cap portfolio is down only 27 percent, Widget is happy and the managers of Widget's pension plan are happy. But under the same circumstances, few families would be happy to be down “only” 27 percent. Families tend to be absolute return investors, as eager to preserve their wealth as to grow it.

Another way in which family investors differ from institutions is in the emotional toll that portfolio changes take. Families are made up of human beings and managers are human beings. Firing a manager is, like firing an employee, a traumatic event for both parties. Institutions, on the other hand, are, well, institutions.

Finally, the nontaxability of institutional portfolios means that rebalancing activities, like manager terminations, are simpler and less costly for institutional investors. Long and careful research has shown the importance of rebalancing to achieving the best results from an asset allocation strategy, and hence many institutions automatically rebalance their portfolios ...