M* JR on Rebalancing

yogibearbull

M* JR on Rebalancing

Morningstar's John Rekenthaler starts with a simple but unusual observation that if 2 assets have the same long-term (LT) TR, then rebalancing will definitely benefit the TR. He shows this with several made-up examples that involve scaling the returns of various assets to produce the same LT TR and then quantifying the rebalancing benefits. He finds more the paths vary between the same 2 TR endpoints, more the rebalancing benefit.

Unfortunately, different assets rarely have the same LT TRs. But growth and value/cyclicals, US and foreign stocks, may potentially have the same LT-TRs. On the other hand, stocks and bonds, stocks and cash, etc will rarely do so.

He then reports results from actual portfolios where the LT TR vary widely. He concludes that rebalancing isn't good for LT TR but does keep risks (volatility) in check. This isn't surprising because rebalancing is a risk control strategy, not a TR enhancing strategy.

https://www.morningstar.com/columns/rekenthaler-report/when-rebalancing-creates-higher-returnsand-when-it-doesnt

bee

@yogibearbull, I started a parallel discussion referencing the same article after your post here.

My apologies to yogi and readers.

Here's a link to that discussion/reader comments:

https://mutualfundobserver.com/discuss/discussion/62524/when-rebalancing-creates-higher-returns-and-when-it-doesn-t#latest