This study examines the investment strategies of stocks and bonds portfolios under volatile markets

What is it about?

We find that the portfolio with rebalancing outperforms the portfolios without rebalancing. It also outperforms the portfolios with non-diversified investments consisting of stocks only or bonds only. Specifically, the fifteen percent up or down rebalancing threshold on a 60% stocks and 40% bonds initial portfolio offers the best relative returns to risk. We find that fifteen percent rebalancing is also superior under both the lump-sum and the dollar-cost averaging investment modes. The optimal rebalancing strategies depend on the path of the market movements. Investors need to rebalance their asset allocations, but not frequently.

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Why is it important?

The 60-40 rule requires periodic rebalancing between stocks and bonds. Our study shows the rebalancing strategy based on the path of market volatility.