aboose wrote:Can you please explain to me why rebalancing isn't market timing? I have been shamed and made fun of for having this hypothesis but I am not technically experienced or literate enough in order to prove my point.
If we define market timing to be reacted to the current market's state of returns, I propose that rebalancing is market timing (emphasis added).
I think that your definition is incorrect.
Market timing always involves an opinion that predicts a future market development.
Rebalancing involves a present fact (specifically -- the current allocation my portfolio) as compared to my past decision on my target allocation.
"Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods
such as technical indicators or economic data. Because it is extremely difficult to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested" (emphasis added).
Investopdia, "What is market timing?"
"Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements.
The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular financial asset" (emphasis added).
Wikipedia, "Market timing"
1) Rebalancing at a particular time of year is not market timing. No opinion predicting future market events is involved.
2) Rebalancing by bands when the portfolio is off the target allocation is not market timing. No opinion predicting future market events is involved.
aboose wrote:Rbaldini, I don't mean to get into an argument of terms.
What I was hoping for was a technical/backtested analysis of data that shows that rebalancing doesn't hurt returns. I should have put this in my original post, but this is my point. In my view, rebalancing based on % allocation band reactions will hurt long term return because it is reactive to short term market volatility as opposed to the scenario 1 of rebalancing I put. I believe that controlling for time will average out returns, while controlling for asset allocation % will cause fluctuations and hurt returns.
I am not sure if an analysis on this has been done, so maybe I will have to do it myself (emphasis added).
That is a much different question than "Explain why Rebalancing isn't Market Timing?"
To respond to this new question -- there can be a bonus return from rebalancing. William Bernstein, "The Rebalancing Bonus"
. And even a modest bond allocation may substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification"
aboose wrote:There is no Free Lunch. I can accept that rebalancing helps us get back to our emotionally set asset allocations, if it also means we are reducing our returns. Because logically that makes sense.
That's my point, rebalancing based on % asset allocation might not achieve the goal we think it does (emphasis added).
I think that in rebalancing (like asset allocation) the goal is risk reduction rather than to increase portfolio returns.