Rebalancing for long term investors

In this study we show that the rebalance frequency of a multi-asset portfolio has only limited impact on the utility of a long term passive investor. Although continuous rebalancing is optimal, the loss of a suboptimal strategy corresponds to up to only 30 basis points of the initial wealth of the investor, assuming market returns are unpredictable and transaction costs can be ignored. Our results suggest that reducing transaction costs clearly outweighs the benefit of frequent rebalancing. We also show that by ignoring market return predictability, the investor underestimates the utility gain of less frequent rebalancing. In this setting, limiting the frequency to once every quarter results in significant higher utility, even without transaction costs.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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