Research summary

Tuning in to the right frequency for rebalancing

November 01, 2022

Three ways most investors rebalance
A comparison of common rebalancing methods
The frequency component, threshold component, and destination component are displayed for each of the three categories of rebalancing methods: calendar-based, threshold-based, and the combination rule (or calendar- and threshold-based). The strategies tested in the category of the calendar-based method are daily, weekly, biweekly, monthly, quarterly, semiannual, annual, biennial, and no rebalancing. The strategies tested in the category of the threshold-based method are 1% to 15%. The strategies tested in the category of the calendar- and threshold-based method are monthly and 1% to monthly and 15%, quarterly and 1% to quarterly and 15%, semiannual and 1% to semiannual and 15%, and annual and 1% to annual and 15%.
Which method is optimal?
Rebalancing methods and their projected impact on post-transaction-cost wealth
The optimal rebalancing methods are listed for different equity allocations. The first column is the equity allocation, ranging from 35% to 90%. The second column contains the optimal rebalance method and those that are not materially different from the optimal. Annual is included for all equity allocations. The third column is the certainty fee equivalent, or CFE, for annual relative to quarterly and 5% rebalance, ranging from 6 to 14 basis points. The fourth column is the CFE for annual relative to quarterly rebalance, ranging from 10 to 16 basis points. The last column is the CFE for annual relative to monthly rebalance, ranging from 21 to 28 basis points.
Do exceptional markets merit exceptional rebalancing?
The bottom line
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