PT  - JOURNAL ARTICLE
AU  - William W. Jennings
AU  - Brian C. Payne
TI  - Corrections Should Trigger Rebalancing
AID  - 10.3905/jwm.2020.1.116
DP  - 2020 Aug 19
TA  - The Journal of Wealth Management
PG  - jwm.2020.1.116
4099  - https://pm-research.com/content/early/2020/08/18/jwm.2020.1.116.short
4100  - https://pm-research.com/content/early/2020/08/18/jwm.2020.1.116.full
AB  - We start from the provocative contention that if an investor did not rebalance earlier this year (2020), then that investor does not have an asset allocation policy. More specifically, that investor does not have a rebalancing policy to preserve their asset allocation. We then work backward from a presumption that a correction needs to induce a rebalancing trade and develop an algebraic solution for the width of the rebalancing range to ensure it does so. Across a range of reasonable assumptions, rebalancing ranges need to be tighter than traditional norms.TOPICS: Statistical methods, portfolio construction, risk managementKey Findings• Wealth managers promising benefits from rebalancing need to deliver on that promise.• Corrections and bear markets, surprisingly, do not trigger traditional rebalancing ranges.• We develop a nontrivial analytical expression for rebalancing ranges that will trigger in a stock market correction and find they encourage much tighter rebalancing ranges.