tadamsmar wrote:You math is a little wrong. If you start at 50/50 then drift of the ratio toward the higher returning asset will cause the combined return to go above 5%. Never rebalancing will increase your expected returns.AllYouNeedIsLove wrote: A 50/50 portfolio of two components with expected returns of 7% and 3% would have a combined expected return of 5% -- WITHOUT REBALANCING. Rebalancing over time will move assets out of the higher returning portion of the portfolio and thereby lower the overall expected return below 5%. I do not see much discussion on this " decreased expected return cost" of rebalancing.
But if you are just interested in return, the the obvious thing to to is just put 100% of your nest egg in the higher returning asset.
The fact that you are at 50/50 means you are interested more than the highest possible expected returns, you are trying to limit risk. That's the main reason for rebalancing.
There may be a small rebalancing bonus if the market don't act like a random walk, but it depends on how the correlations match up with your rebalancing frequency, whether you are losing to momentum or gaining from reversion.
My post was an attempt to gauge the expected returns between a rebalanced portfolio and a non-rebalanced portfolio with the following facts. The portfolio is currently 55/45 AA, will have no contributions or withdrawals for the next 15 years, and then will be spent down from the over weighted portion of the portfolio to a 50/50 AA.
Before posting I tried to do my own analysis. I began by looking for an empirical result by analyzing the past performance of the Life Strategy Target fund (rebalanced cohort) and the returns of Total Stock and Total Bond (non-rebalanced cohort). I gave up on this exercise due to the trap of making a generalized conclusion on limited past data. Life Strategy only goes back to 1994 and markets in the past 20 years have been unique in certain regards.
The goal of this analysis is to decide if I am comfortable with my current risk (as measured by expected return rather than AA), and to determine if I can lessen my time investment into the management of my portfolio by not rebalancing over the next 15 years.
A good suggestion in this thread was to use a financial advisor, but that is something I do not want to consider as I truly am a DIY (although admittedly a DIY with a desire to decrease my effort on this aspect of my life). Not rebalancing would also simplify the tax issues as I am mostly in taxable accounts.
Thanks for your reply.