Rebalancing Investments - Rebalancing Strategies

Rebalancing Strategies

There are three main rebalancing strategies.

• Buy and hold
• Constant proportion portfolio insurance
• Constant mix

Some say that the exact choice is probably not too important, as long as the rebalancing is performed consistently. Some say otherwise, such as:

• Rebalancing every year:

Rebalancing at exactly the same time each year is easy to remember.

• Rebalancing every 15 months:

The hope is to make a sale qualify for long term capital gain in the United States.

• Rebalancing when current allocation is 5% off from target asset allocation:

Touch nothing except when allocation is off noticeably.

• Rebalance using contributions or withdrawals:

Buy underweighted assets when contributing and sell overweighted assets when withdrawing. This minimizes transaction costs. The contributed or withdrawn amount can be divided across assets in an optimal way that avoids overshooting and minimizes deviation from the target allocation.

Also

• Rebalance Symmetrically whereby allocations across assets or asset categories are traded back to target.
• Rebalance Asymmetrically whereby allocations are only traded where Assets or categories breach tolerances around a target - this is a Transaction Cost Sensitive approach.