Abstract
Robo-advisers enable investors to establish an automated rebalancing strategy for a portfolio usually consisting of stocks and bonds. Since households’ portfolios additionally include further frequently tradable assets like real estate funds, articles of great value and cash(-equivalents), we analyze whether households would benefit from a service that automatically rebalances a portfolio which additionally includes the latter assets. In contrast to previous studies, this paper relies on real-world household portfolios, which are derived from the German central bank’s (Deutsche Bundesbank) Panel on Household Finances (PHF)-Survey. We compute the portfolio performance increase/decrease that households would have achieved by employing rebalancing strategies instead of a buy-and-hold strategy in the period from September 2010 to July 2015 and analyze whether subsamples of households with certain sociodemographic and socioeconomic characteristics would have benefited more from portfolio rebalancing than other household subsamples. The empirical analysis shows that the analyzed German households would not have benefited from an automated rebalancing service and that no subgroup of households would have significantly outperformed another subgroup in the presence of rebalancing strategies.
Highlights
Rebalancing investments, i.e., keeping the relative portfolio weights of different asset classes with calendar-based and/or threshold-based strategies stable, are associated with both locking in a portfolio’s risk exposure at an intended level and the ability to buy assets at low and sell them at high prices
There are no studies that analyze the benefits of such a service from households’ perspective. It is unclear whether households generally would benefit from such a rebalancing service or whether—comparable to active fund management—the portfolio management services and the associated fees would harm households’ investment performance. This study addresses this gap in the literature by analyzing the outcomes of a hypothetical robo-advisor that rebalances households’ investments in the asset classes stocks, bonds, real estate funds, articles of great value and cash (-equivalents)
We report mean and median values, the 20th and 80th percentile and the standard deviation (Sdv.) of the portfolio shares that are invested in the asset classes stocks, bonds, cash(-equivalents), real estate funds and articles of great value
Summary
Rebalancing investments, i.e., keeping the relative portfolio weights of different asset classes with calendar-based and/or threshold-based strategies stable (see Donohue and Yip 2003), are associated with both locking in a portfolio’s risk exposure at an intended level (see, e.g., Tsai 2001) and the ability to buy assets at low and sell them at high prices (see, e.g., Bouchey et al 2012). Only a minority of households rebalances their portfolios (see, e.g., Bonaparte and Cooper 2009; Brunnermeier and Nagel 2008). Possible reasons for households’ inertia ( for households with low portfolio values) are that rebalancing strategies cause transaction and monitoring costs which make a simple buy-and-hold strategy more appealing
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