MDCigan

Vanguard's Jack Bogle on Rebalancing: Don't!

"Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

I'm not sure this really proves anything against rebalancing. First off, the set of asset classes used isn't very diverse. If you used a more comprehensive set of asset classes with more negative correlation like REITs, commodities and precious metals, emerging markets, etc. in addition to just U.S. large-cap and U.S. small-cap, I'd bet the results would be ALOT DIFFERENT in favor of rebalancing.

Secondly, you would want to test different rebalancing strategies in terms of time frame. There is alot of evidence to suggest there is momentum at the 1-2 year time frame, and mean reversion at the 3-5 year time frame. Perhaps rebalancing less frequently then annually would do even better.

As much as Mr. Bogle is respected in the industry, I think it is important to remember he is biased, and I would not accept anything he says at face value without further investigation of the issues.