A Rebalancing Act – Estimating the Value Added through Portfolio Rebalancing

We compare the return and volatility of a Canadian portfolio under a no-rebalancing scenario and ten naive rebalancing strategies, over 35 years (1980-2014) of capital market history. All rebalanced portfolios produce higher returns and lower volatilities than does the non-rebalanced one. Computing the in-sample results for the 1980-1991, 1992-2003 and 2004-2014 sub-periods arrives at the same conclusion.

Finally, we test the same ten rebalancing strategies (out of sample) from the perspective of a U.S., a U.K. and a Japanese portfolio. We find that 29 of the 30 naively rebalanced portfolios outperform their non-rebalanced counterpart. We estimate that, from a Canadian perspective, rebalancing adds 0.57% to risk-adjusted returns before costs, and 0.41% net of transaction and tax costs.