klaus14 wrote: ↑Wed Apr 29, 2020 6:06 pm
it's rebalancing with new money. You buy each asset to its target with new money. You would get the same bonus if you didn't have new money but sold and bought.

Rebalancing bonus relies on mean-reversion. (both assets will revert to the mean in the long term)

Lets separate them out to make it more clear. we'll make the high price higher this time.

Every year, Investor A buys $100 of Fund A as follows:

Year 1: Fund A costs $20/share, resulting in 5 shares bought

Year 2: Fund A costs $33.33/share, resulting in 3 shares bought

Year 3: Fund A costs $10/share, resulting in 10 shares bought

Year 4: Fund A costs $20/share, resulting in 5 shares bought

Result: After 4 years, Investor A has 23 shares worth $460. bought

Every year, Investor B buys $100 of Fund B as follows:

Year 1: Fund B costs $20/share, resulting in 5 shares bought

Year 2: Fund B costs $50/share, resulting in 2 shares bought

Year 3: Fund B costs $5/share, resulting in 20 shares bought

Year 4: Fund B costs $20/share, resulting in 5 shares bought

Result: After 4 years, Investor B has 32 shares worth $640.

Both assets had no dividends, no momentum, no price increase, no rebalancing. $100 was invested per year for four years and that is all. Yet Investor B ended with more money.

It's Time. Adding Interest.