The wide array of returns for the major asset classes in recent history continue to present investors with a study in contrasts. The varied performances also represent a real-time experiment for navigating the rocky terrain of behavioral economics. A wide set of trailing returns are the raw material for a productive round of rebalancing, at least in theory. But it’s also typical to wonder if paring the allocations in the winners and raising portfolio weights in the losers is a smart move this time. Ample return spreads between asset classes look attractive on paper, but rebalancing your portfolio in a bid to capture the expected opportunity is always psychologically challenging. Indeed, it’s hard to buy assets when there’s blood running in the streets. Why? In the dry language of econometrics it boils down to one question: Does reversion to the mean still apply? Deciding how and when to rebalance is never easy or even obvious. But in the long run, it’s the only game in town for a multi-asset class portfolio. But it always comes with risk.
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