Rebalancing
Though New Frontier reviews the index allocations on a monthly basis, trading only occurs when there is a statistical need as identified by the patented RE rebalancing test.
All asset allocation strategies must be rebalanced periodically, as the portfolios drift from their original allocations. For example, a portfolio may start with a 25% allocation to international stock, but if international stock appreciates, that stock may grow to 29% of the portfolio. Provided that the investor still wants the same risk characteristics in their portfolio, in our example, some international stock must be sold and other assets bought with the proceeds to bring the portfolio back to the original allocations. The problem with rebalancing is deciding when to trade. Investors want to maximize the effectiveness of their portfolios, but constant rebalancing saps value.
Most asset allocation managers rely on two simple strategies for deciding when to rebalance. The first is rebalancing at a set time, such as annually. The second consists of rebalancing when the allocations drift outside of set ranges; for example, rebalancing when an asset weight increases or decreases by 5% of the portfolio weight.
New Frontier offers a third option: Resampled Efficiency™ rebalancing. Every month New Frontier determines the currently optimal portfolio and compares it to the currently held portfolio. Advanced statistical analysis reveals whether or not significant differences exist. If there are, the portfolio is rebalanced. If there are not, the portfolio remains as it was. This insight, the when-to-trade rule, garnered New Frontier its second patent. So, rebalancing only take place when needed, preventing unnecessary and ineffective trades.
New Frontier employs Resampled Efficiency rebalancing for our indices. New Frontier's indices are the first to have a rigorous methodology for enhanced portfolio trading and monitoring management.
Investment Calendar
Monthly |
Quarterly |
Annually |
|---|---|---|
We analyze dramatic market movements, update the risk and return estimates, calculate a new efficient frontier, and run the rebalance test. |
We examine the investment universe for possible ETF improvements, analyze the macroeconomic situation, update the risk and return estimates, calculate a new efficient frontier, and run the rebalance test. | We consider long-term capital gains, examine the investment universe for possible ETF improvements, analyze the macroeconomic situation, update the risk and return estimates, calculate a new efficient frontier, and run the rebalance test. |
Back to Index Construction overview>>