Using six factors or smart betas (value, low beta, profitability, investment, momentum, and size) the folks at Research Affiliates tested different portfolio rebalancing approaches and found that a dynamic rebalancing method works best. (see "A Smoother Path to Outperformance with Multi-factor Smart Beta Investing". The research compares buy and hold with systematic rebalancing which moves allocation back to the equal weighted each quarter, and a dynamic rebalancing which allows for modest tilts based on short-term price momentum and long-term mean reversion signals at each quarter.
Factors follow time series patterns which can be used to help with rebalancing. In the short run, follow the trend; however, if there is a large divergence from long-term averages, cut exposure. This will provide a smooth return path.
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