snowmman

Rebalancing Can Be Hazardous to Your Portfolio

Thanks for the replay Phil.
I suppose it's a little muddy since you're mixing historic info (correlations) with non-historic (monte-carlo).

In any case, here's an odd thought.

Assume I have two portfolios. One I decided on an
asset allocation 5 years ago and let it drift without
rebalancing till today. It has some defacto allocation now.

Another portfolio I want to start and allocate today.

Assume that the first portfolio is an ideal state in terms of
risk/return (it's drift has led to more risk, but more return,
but I want that).

And then I want the second portfolio to have the same
predicted risk/return. So I allocate exactly like the state
of the first portfolio.

Take that to the limit, and it says that the optimal risk/return
decision, is made by using a portfolio decision that was
made in the past, and allowed to drift to "some state" today.

That's basically saying the optimal risk/return decision is
made with historic data.

Right?

Isn't this just portfolio optimization using historic data
(and the appropriate software)

It basically is saying you can drift to a different risk/return
point? If so, shouldn't we just design the portfolio with
the higher predicted risk in the first place?

Or is the short term historic data more important. We can
still design using short term data, though.

see what I'm thinking?

-s