|Source: The Wall Street Journal|
Some investment professionals, the WSJ reports, now believe "rebalancing is no better or worse a strategy than buy-and-hold."
A study mentioned here confirms that belief:
Compare the path of two hypothetical portfolios constructed by T. Rowe Price. Each portfolio starts with $100,000, with 60% in a mix of stocks—including shares of large and small companies, U.S. and foreign firms—and 40% in high-quality U.S. bonds. One portfolio is rebalanced annually over the 20-year period through 2015; the other is left alone. Both portfolios deliver the same returns, with annualized gains of just a bit more than 7%.
Rebalancing did reduce volatility. In theory, lowering volatility by periodic rebalancing should enable a skittish investor to come closer to the long-term returns enjoyed by a buy-and-hold investor.
In practice, rebalancing requires the skittish investor to shift money from stocks just when their gains make them look like a great buy and purchase stocks when their prices are scarily depressed. Easier said than done.