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Optimal Rebalancing Frequency/Months?

Posted in Calendar Effects, Strategic Allocation

Is there a preferred frequency and are there preferred months for rebalancing conventional asset class portfolio holdings? To investigate we consider annual, semiannual and quarterly rebalancing of a simple portfolio targeting a 60-40 stocks-bonds mix. We consider all possible combinations of calendar month ends as rebalancing points. We ignore rebalancing (and dividend-reinvestment) frictions and tax implications, thereby giving an advantage to frequent rebalancing. We focus on compound annual growth rate (CAGR) as the critical portfolio performance metric. Using dividend-adjusted monthly closes for SPDR S&P 500 (SPY) to represent stocks and Vanguard Total Bond Market Index (VBMFX) to represent bonds over the period January 1993 (SPY inception) through June 2017 (about 24 years), we find that:

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