Performance comparison of patient and the quick-trigger portfolio rebalancing strategies on South African stocks and bonds

M.Com. (Financial Economics)Abstract: This dissertation assesses patient and quick-trigger portfolio rebalancing policies on South African stocks and bonds by making use of a unique approach of finding the optimal rebalancing frequency and synthetic option construction method. Patient portfolio rebalancing strategies relate to strategies that take a long-term view, by rebalancing less frequently than normal, while quick-trigger portfolio rebalancing relates to excessive portfolio rebalancing. The findings of this dissertation show that quick-trigger rebalancing policies are desirable when we ignore rebalancing costs, and when rebalancing costs are assumed, quick-trigger rebalancing policies become undesirable because the more frequent a portfolio is rebalanced; the more the rebalancing costs are incurred. From the perspective of the unique approach of finding the optimal rebalancing frequency, a patient rebalancing approach tends to dominate quick response rebalancing approach, even if we assume that there are no rebalancing costs. The synthetic option construction strategy favours the quick-trigger rebalancing strategies when rebalancing costs are ignored, but quick-trigger rebalancing strategies are not a profitable approach when rebalancing costs are assumed because of excessive rebalancing. The overall results of this dissertation suggest that during the period between 1999 and 2014, following a patient rebalancing approach would have been more profitable than a quick trigger mechanistic rebalancing approach and that frequent activity should be kept minimal. Action should generally involve something other than rebalancing the portfolio. This result applies to a wide array of portfolio allocations containing South African stock and bonds