Here is another interesting and insightful article from the folks at Spring Valley Asset Management. They ask the question: When should one rebalance their portfolio? It is a question that allocators rarely ask prospective investment managers. However, when one rebalances a portfolio can have an incredible impact on the realized and future performance of their underlying strategies. This Study demonstrates how two managers running identical investment strategies but rebalancing on different dates can achieve substantially different performance.

They attribute this result to path dependency, or as they call it “rebalancing luck.” It does not represent any additional investment skill of one manager over another. They show that differences in performance over 1-year horizons can eclipse an astounding 20%. In addition, over their whole 17-year sample, the difference between the best and worst performing rebalance date resulted in a total return differential of 250%! They go on to provide a novel approach called partitioning to reduce path dependency and realize much more consistent results. The approach also allows them to produce much more accurate return expectations, which should be a critical input into an asset allocation process. The implications of this paper cannot be overstated, and I encourage you to have a read yourselves!