Rebalancing Strategy for Stocks and Bonds Asset Allocation

Abstract

This study examines the investment strategies of stocks and bonds portfolios under volatile markets. We find that the portfolio with rebalancing outperforms the portfolios without rebalancing. It also outperforms the portfolios with undiversified investments consisting of stocks only or bonds only. Specifically, the fifteen percent up or down rebalancing threshold on a 60% stocks and 40% bonds initial portfolio offers the best relative returns to risk. We find that fifteen percent rebalancing is also superior under both the lump-sum and the dollar-cost averaging investment modes. The optimal rebalancing strategies depend on the path of the market movements. Investors need to rebalance their asset allocations, but not frequently.

TOPICS: Security analysis and valuation, fixed income and structured finance, portfolio construction, performance measurement