Portfolio Rebalancing

(Jeff puckering) #1

Read an interesting article this morning from the economist talking through the benefits of regular rebalancing.


I was wondering what people thoughts/ strategies were in this area and if there were any downsides to this strategy? In particular the advantages of having (what I thought) was such a high amount of bonds in the mix for a long term strategy.

The big :open_mouth: quote for me was

‘A $1 investment in stocks in January 1926 was worth $1.81 by December 1940 (after some extreme ups and downs). Bonds did better. A dollar invested in 1926 was worth $2.08 by 1940. A buy-and-hold portfolio of 60% stocks and 40% bonds in 1926 left untouched would be worth just $1.92. But a 60-40 portfolio, rebalanced every quarter, would be worth $2.46, beating both stocks and bonds’

It doesn’t specify if this takes into account the additional fees that must currently come with rebalancing (go freetrade!) and I don’t know if market behaviours have changed significantly since the 30’s but regardless this seems to make a lot of sense. It may be obvious to those more experienced but other than to keep the risk profile the same it is something I wouldn’t have necessarily thought made such a difference!

(Vladislav Kozub) #2

A very interesting article. However, the bonds are only underperforming in the current conditions due to historically lowest interest rates (IR).

From 1918 to 1940, the US IR were between 7% and 3 % (going down post war). When the IR are high, bonds always perform well, whereas stocks do not necessarily - businesses find it harder to borrow hence cannot deliver growth in performance to justify the share price growth.

You can see now the US is increasing the IR steadily, it is 2% already and does not seem like they are looking to stop, hence you could expect bonds maybe not outperforming, but certainly creeping up towards stocks’ performance in the near future.


Like the premise of sticking to simple rules. For a lot of disciplined activity actually, simple and achievable beats complex and ambitious.

As @Vlad says, the bonds performance is in the context of a very different US government in a very different era. Can’t see US rates going up to 7% but hey, clearly the world is unpredictable.

Worth remembering as well that higher interest rate environment doesn’t just pull down stocks due to borrowing costs - there’s also a big impact on share prices from potential investors opting for cash or bonds instead.