I've often wondered, once rebalancing is considered, does the above hold true? Remember, even a portfolio with a 1% allocation to equities will go to zero if equities drop by 100% over a prolonged period, because you are constantly rebalancing your bonds into equities.
I looked at a single example to see how this would have worked. I used the period of 12/31/2006 to 02/28/2009. I compared two portfolios:
Portfolio A: 60% DFA US Large Cap, 40% DFA 2-Year Global Fixed Income
Portfolio B: 40% DFA US Small Cap Value, 60% DFA 2-Year Global Fixed Income
I looked at month-end values, and rebalanced based on 5% bands, i.e. whenever the allocation to a given fund was outside of +/- 5% of the target allocation. Portfolio A required rebalancing on 08/31/2008 and 10/31/2008 (and also on the end date of 02/28/2009, which doesn't matter for this analysis). Portfolio B required rebalancing on 02/29/2008, 10/31/2008, and 01/31/2009.
For the entire time period, we have:
Code: Select all
Portfolio A Portfolio B
Cumulative Return -26.25% -23.00%
StDev of Monthly Return 3.12% 2.73%
So, a few questions for proponents of the Portfolio B-type strategy:
1. Is a 60/40 portfolio with TSM-style equities similar in risk to a 40/60 portfolio with all SCV?
2. Do you feel okay that in a terrible bear market, your "non-fat-tail" portfolio had approximately the same performance as a "fat tail" portfolio?
- DDB