FYI: The ETF industry is defined by only two consensuses. One: to index is better. Two: to rebalance is better.
And to that end, portfolio rebalancing is recommended by virtually every ETF provider, advisor and planner. According to Vanguard, rebalancing can provide 35 basis points of alpha a year. BlackRock rebalances its model portfolios every quarter. While most planners and advisors actively militate for rebalancing.
But does rebalancing add value for investors? Perhaps not, an important new research paper has found.
Regards,
Ted
http://www.etfstream.com/news/6074_new-research-casts-doubt-on-benefits-of-rebalancing
Comments
I’d suggest “end wealth” would be clearer in above statement.
Anyone catch whether the rebalancing strategy provides a more stable (less volatile) ride? That’s been the assumption I’ve operated under in the “post-50” years. But it may well be a faulty assumption.
Total return has always been secondary to me compared to the “sleep well” component which in turn promotes a “stay-invested” attitude, compared with a more volatile ride from which many decide to jump at the worst possible times.
My take from the ETFStream summary is that, to answer @hank 's question, volatility is reduced by rebalancing. This comes from the statement that the Sharpe ratios for rebalanced portfolios was superior (i.e. smaller denominators [standard deviations], assuming the returns were similar).
The paper (again, inferring from the summary) is that this applied only to a portfolio with no flows in or out (or at least no flows out). I'm curious about the impact of rebalancing on one's spend down phase. To put it another way, does rebalancing increase or mitigate sequence of return risk?