Rebalancing for Long Term Investors: Why It Pays to Do Less

JOOST DRIESSEN and IVO KUIPER (2019) “Rebalancing for Long-Term Investors: Why it Pays to Do Less”, Bankers, Markets & Investors. PARIS, France, 158(01). Available at: https://journaleska.com/index.php/bmi/article/view&

40 Pages Posted: 1 Jun 2017 Last revised: 6 Sep 2022

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Ivo Kuiper

Tilburg University - Center and Faculty of Economics and Business Administration; Kempen Capital Management

Date Written: August 23, 2019

Abstract

In this study we show that the rebalance frequency of a multi-asset portfolio has only limited impact on the utility of a long-term passive investor. Although continuous rebalancing is optimal, the loss of a suboptimal strategy corresponds to up to only 30 basis points of the initial wealth of the investor, assuming market returns are unpredictable and transaction costs can be ignored. Our results suggest that reducing transaction costs clearly outweighs the benefit of frequent rebalancing. When we study a setting where asset returns are predictable, we find that a long-term investor that ignores this predictability underestimates the benefit of less frequent rebalancing. In this setting, limiting the rebalancing frequency to once every quarter results in significant higher utility, even without transaction costs.

Keywords: Rebalancing, Multi-Asset, Long Term, Passive

Suggested Citation

Driessen, Joost and Kuiper, Ivo, Rebalancing for Long Term Investors: Why It Pays to Do Less (August 23, 2019). JOOST DRIESSEN and IVO KUIPER (2019) “Rebalancing for Long-Term Investors: Why it Pays to Do Less”, Bankers, Markets & Investors. PARIS, France, 158(01). Available at: https://journaleska.com/index.php/bmi/article/view&, Available at SSRN: https://ssrn.com/abstract=2976225 or http://dx.doi.org/10.2139/ssrn.2976225

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Ivo Kuiper (Contact Author)

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Kempen Capital Management ( email )

P.O. Box 75666
Amsterdam, 1070 AR
Netherlands

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