Articles about Rebalancing Portfolios

Dr. Andrew Lo: ‘Buy and Hold” Does Not Work Anymore, 2012
See full article at Morningstar.com... The MIT/Sloan School of Management professor and Director of MIT’s Laboratory for Financial Engineering has been widely quoted on the implications of the 2008 financial crisis. One theme that Dr. Lo emphasizes repeatedly is that the risks associated with different asset classes can vary dramatically over time and for this reason, risk must be tracked, forecasted and budgeted. In a world in which the risk of any given asset class (and therefore, also the risk of any portfolio of asset classes) can change dramatically in a short period of time, a passive buy-and-hold approach may, in fact, result in unacceptable levels of volatility.
See full article at Morningstar.com...
Dr. Andrew Lo: ‘Buy and Hold” Does Not Work Anymore, 2012
See full article at Morningstar.com... The MIT/Sloan School of Management professor and Director of MIT’s Laboratory for Financial Engineering has been widely quoted on the implications of the 2008 financial crisis. One theme that Dr. Lo emphasizes repeatedly is that the risks associated with different asset classes can vary dramatically over time and for this reason, risk must be tracked, forecasted and budgeted. In a world in which the risk of any given asset class (and therefore, also the risk of any portfolio of asset classes) can change dramatically in a short period of time, a passive buy-and-hold approach may, in fact, result in unacceptable levels of volatility.
See full article at Morningstar.com...
Rethinking Rebalancing, 2007
There are a number of concepts in investing that are treated as though they are as well thought out as gravity—simple, inexorable, and undeniable. The basic idea of rebalancing as it is typically put to investors seems reasonable. Over time, certain parts of a portfolio will out-perform and certain parts will under-perform. At the end of some period of time, those assets that have done really well will make up a higher fraction of your portfolio and vice versa. If you are shooting for a portfolio with a specific allocation to sectors or individual positions, you will then sell some fraction of the betterperforming assets and buy more of the under-performing assets to bring the percentages back to the original target...Mr. Bogle’s analysis [however] suggested that annual re-balancing adds no net value. He looked at a portfolio with a target allocation 50% S&P500 / 50% bonds for all 25-year periods from 1826 to the present. He also looked at a portfolio with a target allocation that is 48% S&P500, 16% small cap, 16% international, and 20% bonds over the past 20 years. In both cases, he found no value added by annual re-balancing. Consider, however, the powerful intuitive case in favor of rebalancing—albeit anecdotally. If you were riding the dot-com wave and had annually re-allocated by selling some of your high fliers and buying under-performing assets that exhibited low correlation to tech stocks (like utilities or REIT’s), you would certainly be better off today than if you did not rebalance. How do we reconcile the commonsense perspective from the dot-com era with Mr. Bogle’s results?
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