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The Rise Of Robo Rebalancing

 March 27, 2012 09:56 AM


Tara Siegel Bernard tells us that automatic rebalancing options are becoming common at 401(k) plans, but the service is still a rarity for online brokerages. TD Ameritrade and Fidelity are among the handful of exceptions, she reports in The New York Times. In a perfect world, these options would be standard everywhere. Rebalancing, after all, is crucial for risk management and earning a decent risk premium through time. Making this essential task easier, by putting it on auto pilot, would be a huge plus for investors.

You can, of course, rebalance on your own. The problem is that most of us don't, at least not on a timely basis, perhaps not at all. The price of inaction can be costly because the rebalancing bonus can be substantial. For example, my research shows that a simple regimen of rebalancing a portfolio comprised of the major asset classes improves performance considerably vs. an unrebalanced strategy over the past decade-plus. Optimizing the process holds out the promise of doing even better.

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That's old news, of course. Numerous studies over the years find that rebalancing is the foundation for successful portfolio design and management. A few examples:

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"Portfolio Rebalancing in Theory and Practice," by Yesim Tokat (Vanguard)

"Active Portfolio Rebalancing: A Disciplined Approach to Keeping Clients on Track," by John Nersesian (IMCA)

"The Importance of Portfolio Rebalancing in Volatile Markets," by Steven Weinstein, et al. (CCH Inc.)

"The Subtle Art of Rebalancing," by Bill Montague (Consulting Group)

Although the topic of rebalancing is no stranger to financial analysis, it's premature to say that the subject has been exhausted as a research topic. Identifying the ideal set of parameters that govern the rebalancing rules is certainly in no danger of full transparency, as a new paper from Research Affiliates reminds.


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