The most perplexing thing I read this week was an odd column by Paul Merriman at MarkeWatch, "Why Rebalancing Could Be a Huge Mistake." He makes the counterintuitive claim that portfolio rebalancing doesnt really work: Conventional wisdom holds that regular rebalancing is a sound practice to control investing risk. But Ive concluded that some of that conventional wisdom is wrong.
I dismissed Merrimans claim offhand because what he described was not true asset class rebalancing. He was looking within the same asset class -- U.S. equities -- and subdividing them into four market cap weighted, style-based subgroups: Large-cap, small-cap, large-cap value and small-cap value stocks.
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