It's important to define portfolio risk, or the type of portfolio risk, that portfolio rebalancing is intended to address. Here are three definitions of risk in relation to portfolio rebalancing:
Risk as Portfolio Volatility: Rebalancing helps control the level of portfolio volatility; i.e. rebalanced portfolios will have a smaller range of volatility over time than non-rebalanced portfolios with the same starting allocation.
However, starting in 1972 with a mix of 50% TSM / 50% 5-yearTreasury notes, during every time period from 1 year to 29 years, the annualized SD of an unrebalanced portfolio was lower or equal to that of an annually rebalanced portfolio. No benefit in "risk control" for rebalancing whatsoever over these time periods beginning in 1972 and ending in 1973 through 2000. Starting in 2000 with a 50/50 mix, the annualized SD for the unrebalanced portfolio was significantly less than that of the annually rebalanced portfolio for every period from 1 year to 14 years. The effect of rebalancing on the volatility of your portfolio depends on the specific time period, and particularly on the volatility of stocks during that time period. If the volatility of stocks was constant over time, then the effect of rebalancing would be predictable. But it isn't, so the effect on portfolio volatility is unpredictable.
Risk as deviation from the Market Portfolio: William Sharpe defines risk in terms of deviation from the "market portfolio" - which is the average AA held by all investors in the aggregate.
For simplicity, assume the market portfolio at Point A is 50% stocks and 50% bonds. An investor who holds 50/50 is holding a portfolio with the average risk level. Let's assume that stocks lose 50% while bonds gain 10%. Now the market portfolio has become 31.25% stocks and 68.75% bonds. An investor who does not rebalance continues the hold a portfolio with the average risk level in terms of the market portfolio; i.e., his risk level has not changed. An investor who does rebalance to 50/50 is now holding a portfolio with an above average risk level; i.e, he has increased the risk of his portfolio. He is a contrarian who is taking on a 50% stock allocation, even though the "average" market allocation to stocks is now only 31%. Sharpe does not advocate rebalancing, because he sees risk in terms of deviation from the market portfolio.
Risk as Negative Convexity Risk is defined as the magnitude of drawdowns of overall portfolio returns as a function of the divergence between asset returns. This is the risk being addressed in this thread.
Rebalancing is similar to starting with a buy and hold portfolio and adding a short straddle (selling both a call and a put option) on the relative value of the portfolio assets. The option-like payoff to rebalancing induces negative convexity by magnifying drawdowns when there are pronounced divergences in asset returns.
The returns of a non-rebalanced portfolio, by definition, does not have negative convexity and avoids this kind of risk.
We don't know where we are, or where we're going -- but we're making good time.