With this blog, I have emphasized over and over again that by ignoring the stock market forecasters and prognosticators and simply following a set of empirically based rules in a disciplined manner, you can meaningfully improve your investment results. Here's an experiment you can do with your own computer to see the results of naked strategies for yourself.

One very simple thing you can do to enhance your return is rebalance your portfolio at regularly scheduled intervals. To test this, select up to ten stocks and then select a time period to test. Go to Google Finance Historical Stock Prices and download excel spreadsheets with the historical stock prices and the time period you have chosen. Then you can copy and past those historical prices into this spreadsheet that Professor Tom Scott of Sweet Briar College (I'm helping guide his "Principles of Investing" class apply rules-based investing strategies) was kind enough to share with us.

The spreadsheet compares the difference in return between a buy-and-hold portfolio with no rebalancing and a portfolio that is rebalanced at regularly scheduled intervals. You can download weekly data, monthly data, or yearly data and enter it into the spreadsheet. The calculation assumes that you rebalance your portfolio back to an equal weighting for each security at the end of each time period.

In most cases, you'll find that the rebalanced portfolio does better than the buy-and-hold. Depending on the volatility of the stocks you select, the difference can in some cases be 2% or more per year.

Now stop and think about this. We're comparing two strategies for investing for the exact same stocks. Yet one strategy results in meaningful differences in return. How is that?

Stocks are constantly oscillating on a range. When you rebalance, what happens is you sell stocks that are trading in the high part of the range and buy stocks that are in the low part of their range.

Now remember, no strategy works all the time for all stocks. It's possible to find time periods and stocks where systematic rebalancing does not produce better results than the buy-and-hold. And you of course need to consider the effects of taxes and trading costs. But if you do this experiment enough times, I think you'll agree that over time, you can add significant value by rebalancing at regularly scheduled intervals in a disciplined manner.

Labels: Sweet Briar