dealtn wrote:
No. Not joining any bandwagon. Just pointing out the asymmetry the author of this system instigated where a requirement for diversification was sufficient at the outset to be required but not throughout its anticipated life. It's not a system I would ever use or advocate, but given this sites roots regarding "amuse, educate and inform" it is remiss not to address the latter 2 of those.
Out of interest what evidence would convince you that any portfolio "needs to be rebalanced"?
Very large n numbers that we simply don't have. We have HYP1 and a few other poorly documented or short-term HYP's scattered around these boards. Could well be survivor bias creeping in there as well. Basically very little evidence on either side to say that rebalancing HYP reduces risk or doesn't. There is one other piece of research that I'm aware of which has been posted several times on the boards and that is the study of the original Dow components. This showed that that portfolio, if left alone, would have done better than the Index and even better if initially equal weighted. But that only adds one portfolio to an inadequate data set.
It's very easy to look at HYP1, or any LTBH HYP left alone for a long time, and see the inevitable imbalance in holding sizes. Very easy to go from that to saying it is therefore riskier than a portfolio where all holdings are the same size. But this misses the performance of the overall portfolio, especially where that performance has been significantly better than the index from which it was taken. We don't know whether, if HYP1 had rebalanced regularly, it's performance would have matched LTBH HYP1. You would certainly have ended up with less difference between holdings but at what cost?
Take 2 portfolios, one with 15 holdings worth £10k each and another with 14 holdings worth £9k each and one worth £50k. The first portfolio is worth £150k and the second £186k. The second portfolio is very unbalanced compared to the first but worth £36k more. Which portfolio is riskier? The second portfolio is definitely riskier than an evenly balanced portfolio worth £186k but compared to an evenly balanced portfolio of £150k? How are we measuring and comparing risks?
Bottom line there is simply not enough evidence out there to claim rebalancing reduces risk. The only certainly is that it increases costs.
BoE