Feb 23, 2020
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Three scenarios are compared:
Rebalancing is an often mentioned tactic utilized in modern portfolios but seldom is it examined from first principles. The act of rebalancing can be useful to offset volatility amongst assets within similar return profiles. However, rebalancing between assets that differ in potential returns can lead to disaster. Compounding requires the ability to earn interest upon interest. If you rebalance away from the compounding asset, then you will counteract the powerful effects of compound interest.