Testing Rebalancing Strategies for Stock-Bond Portfolios: Where is the Value Added of a Rebalancing Strategy?
Hubert Dichtl (Alpha Portfolio Advisors), et al. | September 15, 2011
This research explores why institutional investors tend to favor rebalancing strategies, despite the fact that these approaches necessitate selling a portion of high-performing assets to reinvest in underperforming ones. Our analysis reveals that the financial gains from rebalancing are minimal, suggesting that the primary justification for its widespread adoption lies in risk management. The overarching aim of rebalancing is to reduce risk, particularly concerning the volatility of returns associated with an asset allocation.
The inflation forecast for the Treasury market is once again declining. If this trend persists, it could signal troubling times ahead, reminiscent of a prolonged post-crisis period. The current battle between inflationary and deflationary forces remains uncertain. At this juncture, the yield spread between nominal and inflation-indexed 10-year Treasuries offers little clarity. Given the renewed deflationary anxieties, confidence in the ability to maintain price stability is dwindling.
Mario Draghi, the newly appointed president of the European Central Bank, is committed to achieving price stability and combating inflation. “Gaining credibility is a long and laborious process,” he states. “However, losing that credibility can happen rapidly, and history demonstrates that regaining it incurs significant economic and social costs.”
● Money in a Free Society: Keynes, Friedman, and the New Crisis in Capitalism
By Tim Congdon
Summary via publisher, Encounter Books
In the fifteen years leading up to mid-2007, the global economy experienced remarkable stability, characterized by steady growth and low inflation. However, the Great Recession triggered some of the worst economic disruptions since the 1930s. This downturn involved a dramatic reduction in trade, output, and employment from late 2008 to 2009, followed by a sluggish recovery. What factors contributed to this crisis? What were the intellectual roots of the policy mistakes that led to the Great Recession? Which economic policy ideas have proven effective, and which have not? *Money in a Free Society* comprises eighteen thought-provoking essays addressing these issues, penned by Tim Congdon, a prominent economic adviser during the Thatcher administration in the UK and a leading monetary commentator. Congdon critiques how academic economists and policymakers have strayed from the intellectual legacies of both John Maynard Keynes and Milton Friedman.
If you’ve noticed recent fluctuations, you’re not alone. The economic landscape is riddled with contradictions. For instance, while consumption trends appear encouraging, income growth is decelerating. Simultaneously, the labor market is showing signs of revitalization even as the eurozone crisis deepens.
European Rift on Bank’s Role in Debt Relief
The New York Times | Nov 17
The financial stability of Europe is increasingly dependent on one institution: the European Central Bank, now facing mounting pressure to secure the euro or risk its collapse. “There is no resolution to the crisis without the E.C.B.,” asserts Charles Wyplosz, a professor at the Graduate Institute in Geneva and co-author of a standard textbook on European integration. “The financial resources required are too substantial for any entity but the E.C.B.”
While the euro crisis poses a potential threat to the U.S. economy, it hasn’t yet impacted new jobless claims significantly. Recently, new applications for unemployment benefits dropped again to a seven-month low of 388,000 on a seasonally adjusted basis. Although we haven’t reached the lowest post-recession level of 375,000 recorded in late February, this previous low is now within reaching distance.
Optimists hope that the European Central Bank will eventually take the necessary actions. Yet, at this late stage, it’s uncertain if a shift in philosophy would make a meaningful difference. Year-over-year growth in euro monetary aggregates stands at a sluggish 3%, far from what is necessary for an economy grappling with a banking crisis, persistently high unemployment (over 10%), escalating bond yields, and the looming possibility of a new recessive phase. The push for immediate austerity may lead to dire consequences.
Understanding your investments and their associated risks and returns is crucial for long-term success in investing. Achieving favorable risk-adjusted returns is rarely a matter of chance (with few exceptions). Numerous factors contribute to a clearer picture of the elements driving investment outcomes, with the capitalization factor being the initial aspect to consider for equity portfolios. Generally, small-cap stocks display different behaviors compared to large-cap stocks. Another vital factor, often predominant at various times, is the distinction between value and growth stocks. Studies consistently highlight that companies with low valuations exhibit differing risk and return characteristics compared to their high-valuation counterparts. Importantly, this relationship is not always stable. While this may be well-established knowledge, its practical implications can become complex, as illustrated by a recent essay by investment consultant Ron Surz of PPCA, Inc.
The September surge in retail sales slowed in October, but there are no indications of a recession in U.S. consumer spending as of now. Overall retail expenditures rose by 0.5% last month on a seasonally adjusted basis. Although this marks a significant slowdown from September’s 1.1% increase, if we disregard the particularly anomalous growth observed in September, October retail sales continue to expand at a healthy pace. While no single data point (or series) should be overly scrutinized, current figures do not suggest immediate threats to the business cycle.
This article reflects on the economic landscape and current trends, offering insights into various market dynamics and monetary policies during a tumultuous period. It emphasizes the importance of understanding investment strategies, economic indicators, and central bank decisions. Through careful analysis, investors can better navigate the complexities of the financial world and make informed decisions.
In conclusion, as we examine these economic discussions, it becomes clear that remaining informed and adaptable is crucial for any investor. The unfolding events will continue to shape market conditions, highlighting the need for vigilance and understanding in financial decision-making.
