Portfolio Rebalancing: Tradeoffs and Decisions

21 Pages Posted: 3 Jun 2021 Last revised: 24 Jun 2021

See all articles by Xing Hong

Xing Hong

Dimensional Fund Advisors

Philipp Meyer-Brauns

Dimensional Fund Advisors

Date Written: June 3, 2021

Abstract

This paper identifies a clear tradeoff between tracking error — performance differences relative to a targeted asset allocation — and turnover—a proxy for rebalancing costs — that can help guide investors’ rebalancing choices. We find that calendar-based approaches, while convenient, tend to lead to less efficient rebalancing tradeoffs than rebalancing with tolerance bands. Further improvements can be gained with tiered approaches that apply different tolerance bands across and within asset classes. We do not find evidence that rebalancing choices can reliably increase expected returns. Finally, our study evaluates how rebalancing choices relate to asset allocation and how they may impact a portfolio’s maximum drawdowns and shorter-term return differences to the target allocation.

Keywords: Portfolio Rebalancing, Asset Allocation, Tolerance Bands, Turnover, Tracking Error, Expected Return, Integrated Portfolio

JEL Classification: G11, G12, G14

Suggested Citation

Hong, Xing and Meyer-Brauns, Philipp, Portfolio Rebalancing: Tradeoffs and Decisions (June 3, 2021). Available at SSRN: https://ssrn.com/abstract=3858951 or http://dx.doi.org/10.2139/ssrn.3858951

Xing Hong

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Philipp Meyer-Brauns (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

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