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What are Your Nonprofit Endowment’s Asset Allocation Tolerance and Timing?

There are two important strategies that drive how and when you rebalance your portfolio. First, the percentage tolerance around your asset class weights and second, the timing of your rebalances. We recommend employing both of these strategies to your portfolio rebalancing in order to establish discipline around what could be an emotional process.

Tolerance refers to the amount of drift you’re willing to accept when asset allocation amounts deviate from your stated allocations. For example if your strategic stock allocation is 60% and your tolerance is plus or minus 5%, that means you’d rebalance your portfolio when asset weights deviate more than 65% and less than 55%. The tighter your tolerance the more frequently you will need to rebalance your portfolio. Plus or minus 5% is appropriate for most investors.

Timing refers to when you review your portfolios to determine whether they’ve deviated outside your tolerance. If you decide on a semi-annual schedule to rebalance your portfolio, you would pick two dates, six months apart to review your portfolio for rebalance. You would not rebalance the portfolio outside of these two dates. And if you find on either of those dates that your portfolio is within tolerance, you do nothing.

Deploying both tolerance and timing to your rebalancing strategy is particularly effective for long-term investors. Wide tolerance bands don’t require frequent portfolio trading, saving you time and potential trading fees. Setting a semi-annual or annual rebalancing schedule will ensure you review performance just enough so you can adhere to your investment strategy but not so frequently that you become fixated on short-term performance.

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Fairlight Advisors

At Fairlight, we are uniquely positioned to combine our investment experience with a strong working knowledge of the nonprofit ecosystem in order to bring targeted and effective solutions to bear on today’s nonprofit needs. We work with both teams and individuals to manage risk and optimize investments so our clients’ time is free to continue their primary social mission. We’re hands-on, personal, and we get results.

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