Portfolio Rebalancing Part 1 of 2: Strategic Asset Allocation

AQR

Antti Ilmanen, Thomas Maloney

Research

16 Pages

AQR examines how strategic portfolio rebalancing shapes diversification, risk, and long term returns across multiple asset classes. The paper argues that infrequent rebalancing may outperform rigid monthly schedules because momentum effects persist, while buy and hold portfolios can experience materially higher concentration risk over time.

Key Takeaways

Risk Drift Matters: Buy and hold portfolios reached 104% average allocation drift and a 41.2% maximum drawdown, versus roughly 30% for annually rebalanced portfolios.
Momentum Rewards Patience: Biennial rebalancing generated a 0.44 net Sharpe ratio versus 0.39 for monthly schedules, benefiting from multi month trend persistence between trades.
Costs Stayed Modest: Monthly full rebalancing produced 26.0% annual turnover yet only 0.13% estimated annual trading costs across the hypothetical multi asset portfolio.
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