four main dynamic strategies for asset allocation. The other three strategies are 1) Buy-and-Hold, 2) Constant-Proportion and 3) Option-Based Portfolio Insurance. Rebalancing bonus The promise of higher returns from rebalancing to a static asset allocation was introduced by William J. Bernstein in 1996. Bernstein's proposal has since been shown to only exist under certain situations that investors are not able to predict. At other times rebalancing can reduce returns. It is commonly agreed that: A potential rebalancing bonus is determined by two assets' relative variances and covariance. These metrics are developed by averaging historical returns, which are no guarantee of future results in the short term or long term. E.g. debt is traditionally thought to be negatively correlated to equities, but during the 'Great Moderation' they were positively correlated. The bonus would be maximized by a 50:50 weighting between the two assets. But that is not to say any particular portfolio should have that weighting. The bonus is greater when each asset's price swings widely, so that each rebalancing creates an entry point at a very low cost relative to the trend. But that is not to say price volatility is a desirable attribute of any asset. The bonus is greater when the prices of both assets are increasing at roughly the same trend rate of return. If one asset's growth is much lower, each rebalancing would push money from the winning asset into the losing (or lesser return) asset. The bonus is greater when returns are negatively correlated and revert to their mean on the same cycle as the rebalancing takes place. According to some observers, constant-mix rebalancing strategy will outperform all other strategies in oscillating markets. Similarly, it is argued a buy-and-hold rebalancing strategy will outperform in up-trending markets. Rebalancing strategies There are several rebalancing strategies: Buy and hold Constant proportion portfolio insurance Constant mix Maximizing Sharpe ratio Some say that the exact choice is probably not too important, as long as the rebalancing is performed consistently. Some say otherwise, such as: Rebalancing every year: Rebalancing at exactly the same time each year is easy to remember. (Note: sale of an asset is qualified for "long-term" capital gain or loss, if the asset has been held for 12 months or longer in the United States. Special tax treatments come with the long-term gain or loss.) Rebalancing when current allocation is 5% off from target asset allocation: Touch nothing