The Great Rebalancing Debate

When is it appropriate to rebalance a portfolio? This question, a close companion of the ever-popular "How high is too high?" dilemma, has plagued investors for years, largely because there is no right answer. But if you're open to suggestions, a relatively new Website wants to send them directly to your inbox—for a fee.

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MarketRiders, which launched in May after a test run that began in early 2008, has been touting its ability to boost clients' returns on exchange-traded funds by helping them optimize asset allocation. In a recent release, the company says its rebalancing strategy gave investors in one of its bond-heavy model portfolios the chance to more than double their returns—from 2.37 percent to 5.05 percent—during the turbulent 12-month stretch that wrapped up at the end of September.

[Also see 5 Steps to Set Up a Retirement ETF Portfolio.]

For $100 per year—a fraction of the fees charged by financial advisers for similar services—users can build ETF portfolios on the site and get E-mail alerts when MarketRiders' software signals that it's time to rebalance. Under normal market conditions, the software will call for rebalancing about four times each year.

Mitch Tuchman, a veteran in the Silicon Valley venture capital world and the CEO of MarketRiders, says disciplined rebalancing is essential to profitable investing. But it's also one of the harder parts, since it involves trimming high-performing asset classes and adding to poorly performing positions in order to keep a portfolio in synch with its target allocations.

With MarketRiders' default settings, rebalancing alerts are triggered when actual allocations to an asset class are more than 20 percent out of line with target allocations. "We've figured out that that threshold is sort of an optimized amount of rebalancing for a typical investor," says Tuchman.

Still, for some, four portfolio rebalances per year could seem excessive. "How often investors should rebalance is actually one of the great debates in the industry and in academic circles," says Scott Burns, Morningstar's director of ETF analysis. "There's one argument that says if you rebalance too frequently, you end up missing momentum—that you rebalance out of market runs too soon and switch into things that are going down. There's another that says that says if you rebalance more often, you can keep your portfolio a lot closer to what your asset allocation settings are."

Apart from its rebalancing feature, the site also helps investors create portfolios. But unlike other portfolio-building sites, MarketRiders doesn't actually make purchases or trades. Instead, it provides suggestions and allows users to enter information about their ETF holdings, which the site will then monitor. To get MarketRiders' picks, users input their age, risk tolerance, time horizon, and investing experience, and the site then spits out one of its approximately 18 model portfolios. Given Tuchman's aversion to traditional mutual funds, these portfolios consist exclusively of ETFs. "We're completely, religiously against mutual funds and all things related to active money management because we think that's just a way for people to lose a lot of money," he says.