Rebalancing: A Comprehensive Reassessment

Abstract

Investment advisors, investment books, and investment columns almost never fail to advise investors to rebalance their portfolios. Numerous academic articles have been written about it, most of them arguing that it adds value. Yet the existence and precise nature of that value have remained a subject of intense debate. Most past articles on rebalancing have reduced the comparison of rebalancing with alternatives such as buy-and-hold to a single summary statistic, either expected return or median return. Due to the different skews in the probability distributions, however, comparing a single summary statistic does not support the overly broad conclusions that have often been reached. Comparisons that take the entire distributions into account provide better insight. Results of those comparisons are mixed as to whether rebalancing adds value. This article analyzes the arguments that have been advanced for rebalancing, identifying their points of validity and their flaws. It presents the results of original empirical research, simulations, and mathematical derivations that together identify how often and to what extent rebalancing enhances or degrades the performance of an investment portfolio.