Which method is optimal?
Our strategists employed a framework for determining an ideal risk-return and cost-efficient rebalancing strategy. You can learn more about the methodology in the research paper. It requires forecasting a distribution of asset returns (an entire range of returns rather than a single-point forecast) and transaction costs, which are critical in assessing the impact of rebalancing on portfolio wealth after transaction costs are taken into account.
For investors who don’t participate in tax-loss harvesting or who are not concerned with maintaining tight tracking to a multiasset benchmark portfolio, rebalancing a portfolio on an annual basis was the best method in terms of the risk-return trade-offs. It is optimal largely because it allows investors to harvest the equity risk premium while also generating lower transaction costs than more frequent rebalancing.
