As rising interest rates and Covid uncertainty increase expectations for market volatility, establishing a rebalancing program may be worth consideration. This paper explores the costs and benefits of portfolio rebalancing, with key observations:

  • Significant deviation from a target risk profile can occur over time if a portfolio is never rebalanced.
  • When viewed over multiple economic cycles, the choice of rebalancing approach makes little overall difference in terms of annualized return and risk.
  • Rebalancing reduces risk and can increase risk-adjusted returns (vs. never rebalancing).
  • Rebalancing during volatile market environments is accretive to both return and risk-adjusted return. This is likely due to increased compounding through a reduction in volatility and by “buying the dip” in equity drawdowns.
  • In contrast, we find little benefit to rebalancing during benign market environments.