Does constant asset allocation dominate buy-and-hold?

Moshe Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageAmerican English
Article number105207
JournalFinance Research Letters
Volume62
DOIs
StatePublished - Apr 2024

Bibliographical note

Publisher Copyright:
© 2024 Elsevier Inc.

Keywords

  • Asset allocation
  • Rebalancing
  • Second-degree stochastic dominance
  • Subsistence level

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