Gyroscopic Investing

My understanding is rebalancing is a risk control mechanism to keep cap-weighted momentum from unbalancing the PP.  It also forces you to buy relatively low and sell relatively high.  Having to rebalance every 3 years on average is a pretty darn easy method of market timing!

[quote=http://www.advisorperspectives.com/news ... ncing3.php]The end result was that for rebalancing intervals up to and including a year, the mean rebalancing / buy-and-hold return differential was essentially zero. For rebalancing intervals of three and five years, the mean differentials were five basis points and six basis points annually, respectively. This could possibly reflect the observations that have been made of mean-reversion on approximately a three and a half year schedule.
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Whatever happened to Kshartle anyway?

Reub wrote: Whatever happened to Kshartle anyway?

I think he was banned for being a jerk.

Xan wrote: The thing is, if it's context-dependent, then sometimes it'll help and sometimes it'll hurt, and you can't know which ahead of time.  Which means the bonus doesn't exist, right?

It may be that most of the time, it's a small help, and in a small fraction of cases, it's a big hurt.  That may be why it usually seems to help, even if it averages to zero.

I'm not convinced it averages to zero.  At least with the right allocation. 

Stocks, Bonds, Gold, and Cash are largely uncorrelated over time, but the flow of money between them is anything but random.  The money has to go somewhere.  When one asset falls below the 15% band, then statistically speaking I'd hypothesize that the chances of it rising or falling in the mid-term are no longer 50%.  Any bubble in the other assets driving it down will eventually pop, and the bands are a simple signal to be prepared. 

That said, remove gold or bonds and the rebalancing bonus may look a lot more elusive.  If you slice and dice a 100% stock portfolio (large, mid, small-cap, etc) then IMHO the assets are not as different as the investor wants to believe.  Over time they rise and fall together and relative changes are more likely to be chance than anything else, which means a rebalance may help half the time and hurt half the time.  When the stock market tanks, money is pulled out from all segments and everybody loses.  Any rebalancing bonus would eventually average to zero.