Pragcap: why does the rebalancing bonus work
Posted: Thu Apr 12, 2018 7:03 pm
You don’t rebalance to beat the market. You rebalance to ensure you don’t get scared out of the market. This is the crucial element here. Again, it’s all about behavioral alpha.
Good article, really hits on some points that I think are rarely considered within the personal investment community, and highlights some reasons why the PP is my chosen long-term investment vehicle.The suboptimal strategy that you stick with is better than the optimal strategy that you bail on. That’s because you’ll achieve a higher total return from the suboptimal strategy than you will trying to chase what looks like the optimal strategy (all the while generating lower returns due to higher taxes, higher fees and performance chasing). So you get more return from a suboptimal strategy that you stick with rather than the strategy you’re constantly bailing out of.
I love the term "behavioral alpha". A large appeal of the PP, for me, is the way that it protects me from my own psychology: it prevents me from bailing on the portfolio during times of crisis and uncertainty, and allows me to feel secure in the knowledge that I have an investment strategy that I can reasonably project decades into the future, knowing that I am unlikely to jump ship and the portfolio is unlikely to stop 'working'.
This provides me "behavioral alpha" to a degree that I personally believe is unmatched by virtually any other asset allocation strategy (at least for me).
I wonder what the statistics would be in regards to HBPP long-term 'retention', though. William Bernstein wrote that there is nothing wrong with the PP, but everything wrong with the average PP investor (meaning those who flock to the HBPP in times of crisis and dump it in times of prosperity).