1. These findings are part of the Wells Fargo/Gallup Investor and Retirement Optimism Index conducted July 28–August 6, 2017, by telephone.
2. According to an analysis published annually by Inrix of 1,360 cities, Los Angeles is the most congested city in the world, followed by New York City and Moscow (Korosec, 2018).
3. As Lovell and Arnott (1989) discussed, multiple factors suggest when portfolio rebalancing is timely and appropriate: changes in market prices and return prospects; changes in client objectives; new investment alternatives; and macroeconomic changes. Although all are important considerations, in this article we focus on the first.
4. These costs include the tangible and direct cost of fuel, which totaled nearly $305 billion for US drivers in 2017. And although we may have the illusion of being productive or relaxing while sitting in traffic, we are nevertheless deprived of the option of more practical or more desirable ways to spend our time. Finally, traffic congestion negatively impacts the levels of air pollution and creates other health risks; the reality is that we are compromising our health and leaving our environment worse off for future generations (Zhang and Batterman, 2013).
5. As Malkiel (2015) put it, “We all wish some genie could tell us when the stock market tops out so we could sell. Rebalancing is the closest technique available to do that.”
6. The representative indices we use in our analysis are, for the US markets, S&P 500 Index and Barclays US Aggregate; for Germany, MSCI Germany Index and Barclays Global Germany (5–7Y); for Japan, MSCI Japan Index and Barclays Global Japan (5–7Y); and for the United Kingdom, MSCI United Kingdom and Barclays Global UK (5–7Y).
7. Our research findings indicate the highest extra-return benefit by rebalancing occurs over the holding period of highest volatility, which occurs at one year (Aked and Ko, 2017). In addition, research suggests that annual rebalancing is preferable compared to more-frequent rebalancing, after accounting for taxes, transaction costs, and labor costs (Jaconetti, Kinniry, and Zilbering, 2010).
8. In our simple analysis, we do not account for the costs associated with a rebalancing strategy, such as taxes and transaction costs, which may slightly reduce the end return investors receive. Beyond the scope of this paper, there are strategies to minimize the associated costs, such as rebalancing a portfolio with cash flows to trim rebalancing costs.
9. Hsu (2012) provides more information on, and an example of, how changing risk aversion influences investors’ lack of interest in rebalancing.
10. Ten years is a fairly representative horizon for investors and is also the time horizon used in the All Asset Interactive (AAI) tool.
11. The expression to “institutionalize contrarian investment behavior” comes from Ang and Kjaer (2011), who argued this is the best approach for investing counter-cyclically. Rebalancing, at its core, is investing counter-cyclically. Interested readers can find examples and suggestions to improving rebalancing rules in Section 3.1 of Ang and Kjaer.
Aked, Mike, Rob Arnott, Omid Shakernia, and Jonathan Treussard. 2017. “Hobbled by Benchmarks.” Journal of Portfolio Management, Multi-Asset Special Issue, vol. 44, no. 2 (December):74–88.
Aked, Michael, and Amie Ko. 2017. “Time Diversification Redux.” Research Affiliates Publications (August).
Ang, Andrew, and Knut Kjaer. 2011. “Investing for the Long Run.” In A Decade of Challenges: A Collection of Essays on Pensions and Investments, edited by Tomas Franzen. Stockholm: Andra AP-fonden, Second Swedish National Pension Fund: 94-111.
Hsu, Jason. 2012. “Why We Don’t Rebalance.” Research Affiliates Fundamentals (July).
Jaconetti, Colleen M., Francis M. Kinniry, Jr., and Yan Zilbering. 2010. “Best Practices for Portfolio Rebalancing.” Vanguard Research (July).
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Korosec, Kirsten. 2018. “The 10 Most Congested Cities in the World.” Fortune (February 6).
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