Dynamic rebalancing works when dealing with alternative risk premium

 

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.