| Asset | Price | Lifetime | Last 1000 Days |
|---|
Here's a counterintuitive secret: you can make money by rebalancing between assets, even if those assets have zero growth. This phenomenon is called volatility harvesting or the rebalancing bonus.
Watch how a simple rebalancing strategy turns random volatility into profit:
Two assets (Blue & Orange) with 0% expected return, just random movement. The Green line is a 50/50 portfolio rebalanced daily.
When you rebalance back to 50/50 every day, you're automatically selling high and buying low. The asset that went up gets trimmed, and you buy more of what went down. Do this repeatedly and you capture gains from volatility itself.
60% Stocks / 40% Bonds
This isn't just "diversification" - it's a rebalancing machine. When stocks crash (like 2008), bonds often rally as investors flee to safety. You rebalance by selling bonds (high) to buy stocks (low). When stocks recover, you profit from both the stock rebound AND the smart rebalancing you did at the bottom.
🔑 Key: Stocks and bonds often have negative correlation during market stress, creating free money through rebalancing.
Equal Risk Contribution from Multiple Assets
Hedge funds like Bridgewater's "All Weather" portfolio use this concept at scale. They balance stocks, bonds, gold, and commodities so each contributes equally to portfolio risk. Regular rebalancing between these negatively-correlated assets generates consistent returns even when individual assets go nowhere.
🔑 Key: More assets with different correlations = more rebalancing opportunities.
Rotating Based on Growth & Inflation Regimes
Different assets perform best in different economic environments. By rotating your exposure based on the current quadrant (high/low growth + high/low inflation), you're doing smart rebalancing. Check the "Annual Strategy Tests" in the History tab to see this in action.
🔑 Key: Strategic rebalancing based on economic cycles amplifies the effect.
Switching Between Value and Growth Stocks
Value stocks (cheap, stable companies) and growth stocks (expensive, fast-growing) have historically taken turns outperforming. In rising rate environments, value often wins. In falling rates, growth shines. Rebalancing between them—or better yet, rotating more aggressively into whichever regime favors your style—can dramatically increase returns vs. holding just one.
🔑 Key: Style rotation based on interest rate cycles adds alpha beyond simple rebalancing.
The Three Pillars Strategy
Gold (inflation hedge), Bonds (deflation hedge), and Stocks (growth asset) each shine in different macro regimes. In Q1 (goldilocks), stocks crush it. In Q2 (reflation), gold and commodities soar. In Q3 (stagflation), gold is king while stocks suffer. In Q4 (deflation), bonds rally hard. Rebalancing equally across all three captures gains from each regime.
🔑 Key: Multi-asset rebalancing across macro hedges creates a true all-weather portfolio.
Maximize Risk When Conditions Are Right
Instead of static rebalancing, rotate your beta (market exposure) based on the regime. When in Q1 (goldilocks: high growth, low inflation), go aggressive with 100% stocks or even leveraged equities. When the regime shifts to Q3 (stagflation), pivot hard into defensive assets like gold and short-duration bonds. This is active rebalancing on steroids—you're not just trimming winners, you're completely repositioning for the new macro environment.
🔑 Key: Dynamic beta allocation based on leading indicators can multiply returns, but requires discipline and regime recognition.
Assets must move around. No movement = no rebalancing bonus. But more volatility = more profit (as long as assets don't go to zero).
When assets move opposite to each other, you get maximum benefit. Uncorrelated (random) is okay. Positively correlated (everything moves together) gives minimal benefit.
The magic only happens if you actually rebalance. Monthly or quarterly is common for real portfolios. Daily (like in this sim) shows the maximum theoretical benefit.