Extreme Rebalancing

Most investors are familiar with the benefit of rebalancing. Typically this is looked at using a simple portfolio of stocks and bonds. Let’s say you decide you want a 50% stocks and 50% bonds allocation. If stocks do well for some period of time, then you end up with more money in stocks and a lower relative amount in bonds, shifting your allocation. If, for example, your allocation had drifted to 60/40, then you sell stocks and purchase bonds to bring your allocation back to your 50/50 target. The data on rebalancing are clear…..it really does add some small but meaningful increase in returns over the portfolio that is not rebalanced, and it lowers risk. This is because you are forced to sell the assets that have appreciated (i.e. sell high) and buy those that have declined or lagged (i.e. buy low).

The reason that rebalancing works Continue reading “Extreme Rebalancing”