I never really questioned the recommendation to rebalance portfolios periodically to maintain the 60/40 stock/bond split. Is it just because the bond portion reduces the overall percent impact of a stock downturn?
No, there’s way more to it than that. One of the important bits is rebalancing. By rebalancing periodically, we reduce the impact of volatility on the compound growth of the portfolio over time (aka your wealth).
I’m pasting some references below that I think will be interesting to passive investors who want to know what’s going on with their portfolios. At the end of the day, you’ll probably just buy and hold in exactly the same way, but with more confidence
Intuitively, we know that losing 10% means we need to make ~11% the next year just to break even. The Volatility Drain - Party at the Moontower expands on this and frames it as a difference between arithmetic and geometric mean of the returns over time.
https://breakingthemarket.com/the-arithmetic-return-doesnt-exist/ explains why rebalancing alleviates the problem and reduces the impact of volatility on the compound growth.
https://twitter.com/bennpeifert/status/1362908508237090816?s=21 shows how a portfolio with a negative-return asset can actually grow more than one without it. But this is a topic for another thread…