Everyone uses the word rebalance. I am done with it. Re-optimization fully dominates rebalancing.
Let’s define a rebalancing action as a portfolio reallocation process where an investor recenters a portfolio back to its target allocation. The theory here in that one avoids chasing the hot assets and helps to systematically buy low and sell high. By the way, it works. I remember the late Peter Bernstein citing some analysis showing an average of incremental 82 Bp annually. As an important aside, I also see that optimal strategic rebalanced intervals fall between 8 months and 15 months. So given some real benifits to rebalancing, why am I panning it?
Rebalancing is a relic of a strategically held asset allocation. A strategically held portfolio is a relic of buy and hold process. All of this is a relic of the best equity bull market in the last century. Rebalancing helps investors who would normally detract performance from buying and selling at the wrong times.
For a more prudent investor, re-optimization dominates rebalancing. What’s the difference? Re-optimization allows for a more dynamic process. It does not look rigidly at the portfolio components. Re-optimization utilizes the latest data in generating the capital market assumptions. (By the way, the latest data is the best data). Re-optimization also provides for greater discretion in the forecasting of future returns. This is just another area where a manager can add value.
Reoptimization also captures the benefits of rebalancing. Furthermore, reoptimization performed in Gsphere, I think, offers greater utility in the reallocation. Why? Because correlations tend to drift while risk values tend towards jump diffusion. This means that an effective rebalancing action action can be more closely maximized working with data that trends rather than jumps. This action makes the data more predictable, engendering the greatest utility from the optimization.