Portfolio Rebalancing – Hype or Hope?

Abstract

The present study uses data from the U.S. for the 20-year period 1983-2012 to examine whether there is evidence that statistically significant value exists for various portfolio rebalancing strategies. The study found that the differences in return from various periodic-cum-threshold rebalancing strategies compared to a buy-and-hold strategy is only 11 basis points and that the mean difference of various periodic rebalancing strategies from a buy-and-hold strategy is not statistically significant except for quarterly or semi-annual portfolio rebalancing strategies. Moreover, the cost of rebalancing is substantial. Given taxes on capital gains and monitoring costs, the analysis shows that the gains from portfolio rebalancing are insignificant. The hype associated with such strategies does not withstand the test of data in the long run. There may be a case for portfolio rebalancing, especially for asset rotation during business cycles. But the evidence provided by this study does not support a case for active rebalancing, a finding which is consistent with the existing compelling evidence against active portfolio management.