Wednesday, January 11, 2017

Is Portfolio Rebalancing a Waste of Time?

Could investment advisers become even more redundant? On average, they can't pick stocks that do better than average. So they settle for allocating assets and periodically rebalancing to maintain the ideal allocation. But what if their clients would be just as well off if their portfolios remained untouched?

Source: The Wall Street Journal

Some investment professionals, the WSJ reports, now believe "rebalancing is no better or worse a strategy than buy-and-hold."

A study mentioned here confirms that belief:
Compare the path of two hypothetical portfolios constructed by T. Rowe Price. Each portfolio starts with $100,000, with 60% in a mix of stocks—including shares of large and small companies, U.S. and foreign firms—and 40% in high-quality U.S. bonds. One portfolio is rebalanced annually over the 20-year period through 2015; the other is left alone. Both portfolios deliver the same returns, with annualized gains of just a bit more than 7%.
Rebalancing did reduce volatility. In theory, lowering volatility by periodic rebalancing should enable a skittish investor to come closer to  the long-term returns enjoyed by a buy-and-hold investor. 

In practice, rebalancing requires the skittish investor to shift money from stocks just when their gains make them look like a great buy and purchase stocks when their prices are scarily depressed. Easier said than done.

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