Rebalancing in a goals based approach

CFA Level III
#1

Reading 17 page (315) there’s a blue box called “Rebalancing in a Goals Based Approach”.

It states “Sub portfolios with shorter time horizons for goals with high required probabilities of success will tend to contain relatively low-risk assets, whereas risker assets may have high allocations in longer-horizon portfolios for goals with lower required probabilities of success. Thus there is a greater chance that the exposure to lower-risk assets will creep up before one experiences the same for risker assets. Thus, failing to rebalance the portfolio will gradually move it down the risk axis-and the defined efficient frontier - and thus lead the client to take less risk than he or she can bear”

This doesn’t make sense to me. Even if you have a high allocation to your personal risk bucket (holding T-Bills) and a low allocation in your market & aspirational risk buckets (holding market & high risk assets). Surely the additional return from the risky assets in the market and aspirational risk buckets would increase their relative weighting over time, whereas the text above suggests the opposite?

Can anyone please clairfy this for me?

#2

Goals that you want to achieve with a very high probability (certainty), you will want to conservatively allocate a high initial capital, or assume a very low discount rate (rate of return).

Note that low discount rate means high “present value of capital” being allocated towards satisfying this goal (which has a high probability)

As time passes, this portfolio would likely outperform the assumed discount rate (since we assumed a very low/conservative rate of return), and your $capital being allocated to that goal would become higher than what your estimate/ was or what you were comfortable with (which is Not efficient allocation of capital)

Therefore, we would need to rebalance the portfolio, as eventually, the client would get down a place where he/she is taking less risk than what they can bear.

#3

That makes sense, thankyou