Portfolio rebalancing
The benefits of portfolio re-balancing derive from controlling risk and not from an increase in the expected returns. The proposition that rebalancing can increase the expected return of a portfolio is dubious. One thing is certain: rebalancing entails costs and costs reduce expected rates of return.
For rebalancing to increase expected returns over time, asset prices would have to be consistently mean reverting and clients would need to be able to accurately time their rebalancing decisions. We do not recommend a market timing strategy or attempts to drive a “tactical” asset allocation strategy through a rebalancing strategy.
A portfolio’s asset allocation determines the portfolio’s risk and return characteristics.
Over time, as different asset classes produce different returns, the portfolio’s asset allocation changes. To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.
We have developed a framework for developing rebalancing strategies that can accommodate changes in the financial market environment and in asset class characteristics, as well as account for a client’s unique risk tolerance and time horizon.