Phil DeMuth_

Rebalancing Can Be Hazardous to Your Portfolio

Hi David,

The purpose of bonds in a portfolio is either for income or to control volatility, so an investor should have whatever allocation to bonds is appropriate to his or her goals. My guess is that rebalancing just among equity classes would slightly lower risks and possibly raise returns as well but I would rather see some numbers put to this before assuming that this would be so. Rebalancing is basically a grudge match between two effects: momentum and valuation. In theory, rebalancing too often cuts off momentum at the knees, but rebalancing too infrequently fails to take advantage of misvaluations. Or something like that.