Once again 'rebalancing bonus' has no relation to risk, no matter how you define risk, because it merely benchmarks the return of something you can do, periodically rebalance a portfolio to X% stock and (100-X%) bonds, to a simple return measure of something you can't actually do, 'just give me X%*stock return + (100-X%)*bond return'.Dude2 wrote:I wouldn't define risk as standard deviation. I'd use standard deviation as a measure of volatility. To me risk is that nebulous factor that we can never really quantify. Given efficient and sane markets, higher recognized risk demands higher returns, and hopefully the market keeps on top of that. If risk is changing, even as my AA is fixed, then what conclusions can I draw about anything? That is all I was trying to express. We may have some disagreements even in this thread about whether the rebalancing bonus exists, but those that believe it does exists believe it is small. Something small may be able to be explained by other factors, like varying risk, luck, timing.
And there's no doubt a significant 'reblancing bonus' has existed for loosely correlated assets like stocks and bonds, though like any other past result it's not gteed to exist or be any particular amount in the future. OTOH on a forward looking basis you don't know the individual returns of the components of a portfolio anyway. But it seems it might not be redundant to keep repeating: all 'rebalancing bonus' means is if return of a portfolio periodically rebalanced to given weights exceeds the weighted return of the individual components. It doesn't compare different strategies you could actually implement, and thus the 'risk/return of the rebalancing bonus' is a meaningless concept.
The risk/return of actual strategies which vary the components weights over time (to maintain constant risk, based on trend following, etc) is a different question, nothing directly to do with 'rebalancing bonus' as the term has been understood.