An example of an investor’s risk profile in this context is a portfolio that is 40% US equities, 30% European equities, 15% Emerging Markets and 15% Commodities. This is a distribution described as for a risk tolerant investor. For evaluation purposes, I want to keep the target risk profile a constant, so that the effect of changes in rebalancing schedules and changes in sell triggers may be observed.
The purpose therefore is to consider different rebalancing schedules and risk imbalance tolerances. I assume short term realized gains are taxed at higher rates than long term gains, and therefore the choice of rebalancing periodicity is likely to affect the after-tax return. Moreover, risk imbalance tolerance will likely change short-term realizations and change tax effects. However, how positive the effect of tax-loss harvesting can be also depends on whether markets go up or down.
An example of a tolerance boundary in this strategy is plus or minus 5%. In this case, the SPX holding would be allowed to flex between 35% – 45% without triggering a transaction. However, when the fixed rebalancing date arrives, you would rebalance SPX holdings back to the 40% target no matter what.
In summary, I can compare a buy and hold strategy to rebalancing strategies with different boundary widths and different periodicities and observe what would have worked better in the past. I don’t have a guess at this time for what variable settings will work best. So stay tuned and come back.
