Prices falling? By rebalancing, buy more

Genevieve Signoret

Letter from the President

Our short-term model portfolio[1] is getting clobbered by a small (originally 5%) position in an ETF that buys a broad basket of commodities futures. The problem is, of course, energy prices: energy commodities have a 60% weight in this fund, so the fund has lost 14.3% over the past three months. Our model portfolio has dropped 1.1% over the same period.

Stung by the volatility that this fund unexpectedly introduced into our short-term portfolio, at some point we’ll want to lower the weight on this fund, or choose another way to hedge against inflation. But we aren’t bailing ship now. Why lock in losses?

Instead, we’re buying more. In the model portfolios, we did it through our annual rebalancing exercises: via simulation, to restore our target allocation, we “sold” shares in funds that had appreciated and bought shares in the worst performers. Naturally, then, we’re “buying” more of that sorry-priced commodities futures fund. (Also, in our medium- and long-term portfolios, energy equity funds.)

With actual client money, we rebalance the same way. By engaging in prescheduled periodic rebalancing, no matter what the market is doing, we systematize the practice and discipline of buying low and selling high. The only difference is that, with client portfolios, portfolio strategies and rebalancing dates client-specific.

Note that we do think energy prices will eventually rebound, for three reasons:

  1. Supply: if prices fall low long enough and stay low long enough, shale energy investment and output will eventually slow down.
  2. Demand: eventually, global economic activity and thus demand for energy will again accelerate.
  3. The U.S. dollar will eventually weaken against foreign currencies.

We lay out scenarios as to when this might happen in our forthcoming quarterly forecast report.
Previous Letters from the President

Are you saving enough? (2014 14 11)
Keeping ETF trading costs low, Part I (2014 31 10)
Seizing on this moment and congratulating you (2014 10 17)
A buying opportunity (2014 10 16)

[1] Read descriptions of these portfolios here. Clients receive details on their composition in addition to individualized strategies and portfolio management services. To request more information, please write to

Update History:

  • 1 December 2014: “and bought shares in the top worst performers”.
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