88th International Atlantic Economic Conference
October 17 - 20, 2019 | Miami, USA

Automated portfolio rebalancing: Autonomous erosion of investment performance

Saturday, 19 October 2019: 2:40 PM
Matthias Horn, Dr. , Department of Finance, Bamberg University, Bamberg, Germany
Andreas Oehler, Professor , Finance, Bamberg University, Bamberg, Germany
Robo-advisers enable investors to establish an automated rebalancing-strategy for a portfolio usually consisting of stocks and bonds. Since households’ portfolios additionally include further frequently tradable assets like real estate funds, articles of great value, and cash(-equivalents), we analyze whether households would benefit from a service that automatically rebalances a portfolio which additionally includes the latter assets. In contrast to previous studies, this paper relies on real-world household portfolios which are derived from the German central bank’s (Deutsche Bundesbank) Panel on Household Finances (PHF)-Survey. We compute the portfolio performance increase/decrease that households would have achieved by employing rebalancing strategies instead of a buy-and-hold strategy in the period from September 2010 to July 2015. For these purpose households’ portfolio performance is computed for (a) a buy-and-hold strategy, (b) periodical rebalancing strategies with rebalancing after (b1) one month or (b2) one year, and (c) threshold rebalancing strategies with rebalancing when the worst and best performing asset classes’ returns in a household’s portfolio diverge by (c1) 5%, (c2) 10%, or (c3) 20% compared to the last rebalancing. The portfolio outcomes are computed as the mean portfolio return, portfolio return’s standard deviation, and the portfolio’s Sharpe-Ratio and Adjusted Sharpe-Ratio. We furthermore analyze whether subsamples of households with certain sociodemographic and socioeconomic characteristics would have benefited more from portfolio rebalancing than other household subsamples. The empirical analysis shows that the analyzed German households would not have benefited from an automated rebalancing service and that no subgroup of households would have significantly outperformed another subgroup in the presence of rebalancing strategies.