Rebalancing could be worth the hassle involved
A couple of studies suggest that rebalancing
does actually work in the real world. By rebalancing your portfolio instead of not rebalancing it, you can achieve better returns with less risk.
TIAA-CREF compared the performance of a rebalanced portfolio with one that wasn’t. The starting portfolio for both was 49% shares and 51% bonds, Phil Oakley in Money Week
explains. The rebalanced portfolio was rebalanced every year. The other one left alone.
From 1992 to 2002, the rebalanced portfolio made the most money out of the two.
Another study by Craig Rowland and JM Lawson looked at the performance of equally dividing your money between shares, cash, bonds and gold from 1972 to 2011. Compared with a portfolio that drifted with the market, a rebalanced portfolio gave annual returns of 9.5% to 8.8% for the drifting portfolio.
Rebalancing reduces your investment risk
This may not sound like a big difference between the performance of the portfolios, but look a little closer. Over 39 years, the rebalanced portfolio only had four years of losses compared with 11 years for the drifting portfolio.
And in those losing years, the rebalanced portfolio’s worst loss was 4.9%. On the other hand, the drifting portfolio’s worst loss was 21.6%!
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This study shows that in spite of not shooting the lights out, on an average basis over 39 years, the rebalanced portfolio was more consistent and less volatile.
So there you have it, why rebalancing can pay off if you invest for the long-term.