I now have 25 years of data on portfolio rebalancing. The lesson from the data is very clear: rebalancing lowers portfolio volatility. This benefit occurs regardless of whether you keep your money in your portfolio or you make withdrawals each year.
You can see the numbers and the methodology for rebalancing here. Though the strategy works, many investors don’t rebalance. Jason Hsu of Research Affiliates has some thoughts as to why, and you can see his explanation here. But I have my own opinions, as well.
At the most basic level, I think rebalancing lacks the emotional appeal that many other strategies have. Rebalancing reduces portfolio risk by preserving the benefits of diversification. As such, it is designed neither to maximize absolute returns nor to avoid losses. Rather, it is designed to find a middle ground by seeking good risk-adjusted returns. From a rational point of view, rebalancing is a good strategy.
Reality is different, however. We humans are encoded with a strong sense of risk aversion. Studies show that we react more strongly to losses than to gains. Yet, rebalancing prompts you to buy into falling markets. It is a buy fear, sell greed strategy. As Jason points out, going against the grain can create career risk for financial professionals and marital strife for individual investors.
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