Rebalancing strategies and the performance of balanced portfolios: 1925–2001

Abstract

The results of a study of the performance of balanced portfolios in South Africa over the last 77 years are presented. Using the asset classes South African equities, bonds and cash, five portfolios of widely varying composition were formed. In addition two portfolios containing a portion of the equity allocation in the US market were created. Three rebalancing periods of a month, a quarter and a year and a strategy of rebalancing whenever the equity proportion of the portfolio moved more than five percentage points from its target were tested. The compound annual returns of the portfolios were largely unaffected by the choice of rebalancing period. A small increase in portfolio standard deviation was found as the rebalancing period increased. In the absence of transactions costs it appears that an annual rebalancing strategy would have been the best choice. However annual rebalancing resulted in large deviations in the portfolio equity proportions during the rebalancing period, particularly for portfolios with low proportions of equity.