Following a timetable of rebalancing quarterly or even twice a year results in having investors missing gains and take on the losses of a particular sector, said Matthew Tuttle, the portfolio manager of Tuttle Tactical Management U.S. Core ETF (TUTT). Focusing on volatility helps investors keep more of their winning stocks while selling the losers.
“In traditional portfolio construction, volatility is assumed to be static, and today's volatility is viewed as tomorrow's volatility,” he said. “Targeting portfolio volatility is a much better approach.”
This strategy calls for investors to rebalance by the market and not follow the traditional method of maintaining the same stock and bond allocation. An investor with a portfolio consisting of 60% of stocks and 40% in bonds would have to sell his winners and buy their losers if their stocks rose to 70% of their allocation because of gains in the market. A tactical rebalancing strategy calls for investors to stick with their winners and purchase an even greater percentage, Tuttle said.
Volatility should not be viewed as a negative factor since returns do not always decline when the asset’s volatility increases.