To be more clear, I don't change my allocation based upon current market conditions, and never have -- that includes Black Monday, the dotcom bust, 2008, and a few years ago. Most of the time, I don't even know what those conditions are. I do direct new money toward under-allocated assets, and withdraw from over-allocated assets.Recency bias has little correlation with experience.
Rebalancing as defined by Harry Markowitz in the early 1950’s in his magazine article Modern Portfolio Theory is a disciplined way to consistently buy low and sell high. The financial benefits are common sense albeit hard to measure without personal experience.
Return variations are relative, can show up anytime, and can be put to good use through a little planned application and discipline. There’s no reason to assume an individual’s inability simply because of age or inexperience.
It’s a simple matter to compare personal returns against market returns. And after two or three years a young investor will see the benefits of rebalancing for their self.
MPT describes something that exists much more in theory than in practice. The risk-free choice for a 50-year portfolio would need to have risk-free returns for the next 50 years. There is no such thing -- you can't have no risk for 50 years when buying securities with a maximum 30-year term that therefore require a minimum of one additional purchase with inherent interest rate risk.
The only study that I've seen which purports to show an actual, measurable financial gain from rebalancing is Opportunistic Rebalancing: A New Paradigm for Wealth Managers by Gobind Daryanani. That study showed the most effect with a method that required 20% rebalance bands, and a "look interval" of five market-days to achieve a 0.61% improvement over 10-year periods.
Comparing market returns after two or three years only shows short-term volatility, it says nothing about long-term results. The better question for that interval is how the individual investor reacts to any given level of volatility. That in turn will tell them how comfortable or uncomfortable they are with their asset allocation -- whatever it is. This is actually easier to determine by following logic that is the reverse of rebalancing and looking a lot. Only then will they know how they feel about a single big drop when they actually see it.
Statistics: Posted by GAAP — Fri Mar 08, 2024 4:15 pm — Replies 56 — Views 3202