Strategic Rebalancing
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Introduction
Many investors don’t realize that a mechanical rebalancing strategy, such as a monthly or quarterly reallocation towards fixed portfolio weights, is an active strategy. Winning asset classes are sold and losers are bought. During crises, when markets are often trending, this could lead to larger drawdowns than a buy-and-hold strategy. We show that these drawdowns induced by naïve rebalancing could be mitigated, taking the popular 60-40 stock-bond portfolio as our use case.
