### Momentum as Moderator of Portfolio Rebalancing Risk

**September 19, 2014** - Momentum Investing, Strategic Allocation

Does playing trends both ways via periodic rebalancing (betting on reversion) and momentum (betting on continuation) reliably produce attractive outcomes? In the August 2014 version of their paper entitled “Rebalancing Risk”, Nick Granger, Doug Greenig, Campbell Harvey, Sandy Rattray and David Zou investigate the effects of adding a momentum overlay to a conventionally rebalanced stocks-bonds portfolio. They note that periodic rebalancing to fixed asset class weights tends to perform well in trendless markets exhibiting mean reversion but suffers during extended trends. They consider simple examples using a 60% target allocation to the S&P 500 Index and a 40% allocation to 10-year U.S. Treasury notes (T-note), rebalanced monthly or quarterly. Their momentum strategy employs a complex daily moving average cross-over model with target volatility 10% that has an average annual turnover of 400%. Using both theoretical arguments and empirical analysis of daily and monthly asset class proxy returns during January 1990 through February 2014, *they find that:* Keep Reading