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Rebalancing - Ignore the Crowd… Follow Your Policy

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  • There is a lot of uncertainty in the markets today

  • Aon typically recommends a disciplined rebalancing process

    • It helps investors to stay focused on long-term policy

    • Timing markets is costly and success is hard fought; while rebalancing strategies usually outperforms those strategies which don’t rebalance in prolonged bear markets (and thus drift from policy)

  • While rebalancing within their policy ranges, investors may also benefit from some market opportunities during market dislocations. An “Opportunity Allocation” is a way to embed this type of approach into an institutional investor’s asset allocation structure.

Continue reading the whitepaper below to learn more.


Voices in the media seem to be getting louder and louder with concerns regarding COVID-19, the oil crisis, and ramifications of market volatility (all which are valid and bear notice). However, they can lead to poor decisions with regard your investment portfolio especially when the momentum of the stock market appears headed one way (down) and every piece of news that comes out seems much worse than the last. Not only do the shouts from the crowd give investors cause for concern, but the field of behavioral finance demonstrates that our own innate human tendencies work against us, as most individuals exhibit the bias of extrapolating recent events well into the future.

Aon advocates that most of our clients follow a disciplined, policy-oriented rebalancing strategy. Two of the primary reasons for this are:

1. Focusing on Long-Term Policy Provides Opportunities

Our clients typically have long-term time horizons and their policy asset allocations reflect such time horizons. If the appropriate equity allocation for an institution is 50%, for example, then the institution should have 50% in equities, not 43% or 57%, etc. Said differently, if we see our clients take the brunt of a market decline, we also want to see them get the full benefit of a rebound, taking advantage of dislocated financial prices, whenever the eventual turnaround occurs.

2. Timing Markets can be Costly

Market timing is a difficult endeavor. Unfortunately, the market does not loudly sound the “all clear” horn when things are about to get better and the market is ready to resume its upward march. As shown in Table 1 and Graph 1, missing the best week of returns during the recovery from a bear market can have a dramatic impact on performance.

The events unfolding in the markets are truly monumental, whether it is a pandemic that spreads around the world, or a crushing crude oil price war. We’re certainly not debating that point. We note, though, that there have been many historic events in the past as well, whether they be the Great Depression, wars, severe stock market crashes and sell-offs (October ‘87, Asian Contagion, the Tech Bubble Collapse, 9/11, Financial Crisis in 2008 etc.). Eventually, markets recover as shown in Table 2, and we believe those that have the conviction to remain within their policy allocation ranges are more likely to outperform those that don’t. Rebalancing to the long-term policy allocation range allows investors to participate in the ultimate recovery without risking missing the best weeks that could count for the big chunk of a renewed bull market.

We tested two portfolios starting at a split of 60/40 between equity and fixed income over multiple historical bear markets that have lasted more than one year. Portfolio A rebalances on a monthly basis to its target allocation while Portfolio B drifts with the markets. Over all bear market cycles tested, the disciplined Portfolio A has outperformed a non-rebalanced Portfolio B, as shown in Table 3.

How to Rebalance? 

In times of rising volatility, the correlation among various asset classes often increases. The panic driven selling in equities could even drive down prices of defensive assets and increase risk premiums for many non-equity assets. We encourage investors to stay calm and take advantage of market dislocations to rebalance the portfolio to a desired long-term target range. Market volatility may make it difficult to move to the policy allocations or even trade efficiently; thus, a legging-in approach may be appropriate – moving back toward policy over a few consecutive weeks while making sure there’s enough market liquidity to handle the trades.

While we usually do not recommend large tactical positions, modest tilts toward more attractive markets—done within the ranges of the investment policy—can add value. We see two main ways to do this.

The first is to apply tilts within the existing asset allocation categories in investment policies. Most investment policy statements have both target allocations and ranges, allowing this approach to be done in a risk-controlled way. Investors can transact explicitly to create the tilts, but often we see investors using these views more to determine how they rebalance and allocate cash flows—e.g. affecting whether to rebalance to above or below target, where contributions should go, and what to sell when needing to fund cash outflows. Aon produces Medium-Term Views to help with these types of decisions.

Another approach is to add an “Opportunity Allocation.”1 An Opportunity Allocation is not an investment in and of itself; rather, it is part of an investor’s governance structure that helps facilitate the execution of great ideas in the portfolio. An Opportunity Allocation is flexibility built into the investment policy statement to enable investors to make investments that may not fit within a “primary” asset allocation construct. Aon clients have used Opportunity Allocations for more than a decade, and these allocations have typically made a positive performance (and sometimes diversifying) impact during periods of dislocation, when some niche strategies become attractive.


While it might feel tremendously difficult at the moment, most of our clients should follow their rebalancing policies. Doing so requires the conviction to ignore the voices heard in the media (and potentially within our own heads) and maintain a steady hand, which for most will mean selling bonds, buying stocks and implementing suitable opportunistic strategies.

1 Aon research: When Opportunity Knocks Again, March 2019

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