Some numbers

I highly recommend looking at this blog,, especially the following posts:

  • Shannon's Demon

  • The Mythical Rebalancing Bonus - Part 1

If you have been following my own posts you'll remember that rebalancing works when relative prices experience cycles, while it does not work when relative prices diverge. Shannon's Demon is a case of noisy but stable relative prices. It is the golden case for rebalancing. However, it is not a realistic situation.

In The Mythical Rebalancing Bonus - Part 1, the author looks at various multi-asset mixes and various time frames. The observation is that over recent samples (1996 to recent years), annual rebalancing has brought tremendous benefits. Indeed, the relative price of equities to bonds has been quite stable thanks to stellar bond returns, while also experiencing very ample cycles in times of crisis. If you look at longer periods, or if you change the duration of the bond index, this feature breaks down. The relative price is just less stable and less cyclical. Rebalancing is much less favourable.

No rebalancing is not an option in the multi-asset space. The main choice is between slow rebalancing and fast rebalancing. In all cases, rebalancing needs to be relatively slow (semi-annual to annual) if calendar based. Trigger based rebalancing (as a function of observed deviations in weights) is also quite a sound practice. Fast rebalancing can serve as a reference but it is in most cases beaten by slow rebalancing.

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