This is a simplified analysis of rebalance strategies. I have used a simple portfolio of two ETF's ,VGS for global shares representing growth assets and VGB for defensive assets. I have assumed an initial asset allocation of 70% growth and 30% defensive assets. I have ignored dividends in this analysis. I have not taken costs into account. Data from mid 2015 to today.
VGS - MSCI International Shares accument.au/search/vgs
VGB - Australian Government Bonds accument.au/search/vgb
I have used two techniques to rebalance, time and a trigger.
I looked at 7 scenarios:
Static with no rebalance, the portfolio was left untouched.
Annual and semi annual rebalance back to 70:30
2%, 3%, 5% and 8% triggers where I rebalanced back to 70:30 whenever the trigger level was met on the upside or downside in other words for a 2% trigger I rebalanced whenever defensive assets were less than 28% of the portfolio or more than 32% of the portfolio.
I have calculated daily returns and then looked at the volatility of those returns and the average returns annualised.
Results are above in the chart and below in table.
Rebalance Strategy | Volatility | Ave annualised return |
Static | 9.81% | 4.83% |
Annual | 9.82% | 4.99% |
Semi Annual | 9.70% | 5.03% |
2% Trigger | 9.81% | 5.19% |
3% Trigger | 9.83% | 4.94% |
5% Trigger | 9.87% | 4.99% |
8% Trigger | 10.01% | 5.22% |
I have done another analysis using a smaller data set but including dividend reinvestment. The results were similiar .
The inclusion of costs would clearly favour the wider trigger scenarios, the impact depending on the size of the portfolio and cost metrics.
Falling bond prices over the last 7 months has impacted the success of the rebalance as bonds were not defensive.
If you used cash (AAA) instead of fixed interest you actually get a better result albeit given I have ignored dividends your returns will be lower. This scenario just substitutes AAA for VGB. The first two portfolios remains 70% Growth and 30% Defensive and then I have changed to 80 Growth 20 Defensive and then 90 Growth 10 Defensive.
Rebalance Strategy | Volatility | Ave. Annual Return |
Static | 10.30% | 5.52% |
3% Trigger | 9.74% | 5.42% |
80:20 3% Trigger | 11.16% | 6.16% |
90:10 3% Trigger | 12.5% | 6.98% |
I have also done some modelling using Absolute Return funds as defensive assets. In particular I have used XARO . XARO has only been listed since late 2018 so the data set is not as valuable but this looks promising.
The results overall show that a disciplined approach to rebalancing can reduce volatility and increase returns over the long term.
