Our next situation is a simple sideways movement which takes place for a prolonged period of time. During this time, there are typically micro fluctuations, although the total value of the portfolio remains relatively flat. Although this situation is largely uneventful, we need to evaluate if it provides any opportunities for rebalancing or if it would simply be better to HODL.
Figure 1: This graph illustrates prolonged sideways movement in the market. The white oscillating line is the price of a single asset in a portfolio. The orange line is the value of the portfolio if the HODL strategy is used from beginning the end. The blue line is the value of the portfolio if a rebalance was performed at the white dot. Result: rebalancing results in greater returns than HODL for this type of sideways movement.
Figure 2: This graph illustrates prolonged sideways movement in the market. The white oscillating line is the price of a single asset in a portfolio. The orange line is the value of the portfolio if the HODL strategy is used from beginning the end. The blue line is the value of the portfolio if a rebalance was performed at each white dot. Result: rebalancing results in greater returns than HODL for this type of sideways movement.
HODL
When examining this case, the results of a portfolio which uses the HODL strategy is easy to imagine. There should be no net change in portfolio value. This means from the beginning to the end of these micro fluctuations, we won’t observe any increase or decrease in asset holdings.
Rebalance
Figure 1:
In figure 1, we see the one asset in the portfolio depicted by the white line reduces in value towards the white dot. At this time, the portfolio is rebalanced and the asset experiences accumulation. Then, when the asset increases in value back to the base line, what we end up seeing is an increase in portfolio value. This situation is present whether the rebalance happens at the valleys or peaks of these fluctuations. When the value of an asset returns to its previous value, it results in a net increase in value for rebalancing.
Figure 2:
In figure 2, we examine what happens when we continue to rebalance during prolonged periods of sideways movement. What we see here is that rebalancing during these micro fluctuations actually results in a compounding affect. As we continue to jump from peak to valley, the value of the portfolio continues to climb.
Conclusion
Sideways movement presents a possibility for rebalancing to capitalize on small fluctuations in asset value. Long periods of sideways movement can actually result in increases in portfolio value. In addition, rebalancing frequently can actually result in a compounding affect which boosts performance even further.
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