In James P. O’Shaughnessy’s book, he rebalanced 50-stocks portfolios annually for tax and transaction cost reasons. Since IRA accounts are tax deferred or tax free (Roth IRA), and transaction commissions have come down significantly for the past 10 years, it is important to examine how rebalance frequency affects performance.
To study the rebalance period, portfolio123.com is used to run a simulation with the following
- ranking factors:
- 34.2% – Price to Cash Flow Per Share Ratio, Quarterly
- 34.2% – Price to Sales Ratio, Quarterly
- 5.1% – Short Interest, Percent of Shares Outstanding (%)
- 26.4% – close(0)/((close(120)+close(121)+close(122)+close(123)+close(124)+close(125)+close(126)+close(127)+close(128)+close(129)+close(130)+close(131)+close(132)+close(133)+close(134)+close(135)+close(136)+close(137)+close(138)+close(139)+close(140))/20)
- parameters:
- $0.005/share commission cost
- 0.2% slippage
- 25% stop loss
- minimum $3 stocks
- minimum market cap $50 million
- average 20 day trading amount above $200,000
The returns of a diversified 50-stock portfolio with different rebalance periods from 2001/03 – 2008/03 are in the table below:
| Rebalance Period | Total Return | Annualized Return | Maximum Drawdown |
| Daily | 977.7% | 40.9% | -30.4% |
| 1 Week | 958% | 40.5% | -28.9% |
| 2 Weeks | 853.2% | 38.4% | -30.8% |
| 3 Weeks | 897.1% | 39.3% | -33.1% |
| 4 Weeks | 790.7% | 37.1% | -31.4% |
| 8 Weeks | 722.2% | 35.5% | -33.4% |
| 3 Months | 587.4% | 32% | -33.2% |
| 6 Months | 559% | 31.2% | -30.7% |
| 1 Year | 315% | 22.8% | -33.1% |
There is clear performance and drawdown advantage by rebalancing portfolios on at least weekly basis, by constantly keeping the best 50 stocks in the portfolio.
Individual investors building own portfolio can take advantage of it. Institutions with large amount of money to invest will not be able to take advantage of it, because slippage degrades performance quickly.
