Does constant asset allocation dominate buy-and-hold?

Moshe Levy

Finance Research Letters, 2024, vol. 62, issue PB

Abstract: There is a widespread perception that it is optimal to keep portfolio weights constant over time, and that the optimal rebalancing frequency is just a question of the transaction cost. This is not generally true. We show that buy-and-hold is not stochastically dominated by any constant allocation strategy. Thus, there are some risk averters, including those requiring a minimal subsistence level, who are better-off with a buy-and-hold strategy when returns are i.i.d, even when rebalancing is free. Perhaps surprisingly, the longer the investment horizon, the larger the set of investors who prefer buy-and-hold over constant allocation.

Keywords: Asset allocation; Rebalancing; Second-degree stochastic dominance; Subsistence level (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pb:s154461232400237x

DOI: 10.1016/j.frl.2024.105207

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