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What Does Rebalancing Really Achieve?
Author(s) -
Cuthbertson Keith,
Hayley Simon,
Motson Nick,
Nitzsche Dirk
Publication year - 2016
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1545
Subject(s) - diversification (marketing strategy) , economics , portfolio , confusion , monetary economics , financial economics , business , psychology , marketing , psychoanalysis
There is now a substantial literature on the effects of rebalancing on portfolio performance. However, this literature contains frequent misattribution between ‘rebalancing returns’, which are specific to the act of rebalancing, and ‘diversification returns’, which can be earned by both rebalanced and unrebalanced strategies. Confusion on this issue can encourage investors to follow strategies that involve insufficient diversification and excessive transactions costs. This paper identifies the misleading claims that are made for rebalanced strategies and demonstrates in theory and by simulation that the apparent advantages of rebalanced strategies over infinite horizons give an inaccurate impression of their performance over finite horizons. Copyright © 2016 John Wiley & Sons, Ltd.