Stochastic Analysis of Buy and Hold Versus Annual Rebalancing Portfolio Strategies

Numerous articles in the literature develop theoretical mathematical models that prove rebalancing investment portfolios will outperform a buy and hold strategy on a risk adjusted basis. However, a number of authors using varying asset classes and time periods have found instances where buy and hold outperforms a rebalancing strategy on a risk adjusted basis. This research shows that both can be correct. Most of the papers found in the literature use historical prices and price changes to validate their findings. The research effort detailed in this paper simulates a wide range of possible future asset pricing scenarios that do not rely on historical price patterns. These findings suggest that differences between these two strategies, at a more detailed level, favor the rebalancing strategy, but not exclusively.