Monthly Rebalancing of a 60/40 Stock and Bond ETF Portfolio

Summary

The document demonstrates a systematic monthly rebalancing strategy using SPY for US equities and AGG for investment-grade bonds. It invests 60% and 40% of initial capital, respectively, at the first month end after the backtest begins. At each later month end, it liquidates and reallocates the portfolio to those proportions based on current equity. The article also describes how a backtesting framework can generate exit and buy signals and size purchases from target weights.

In the reported backtest, spanning the stated 2006–2016 data period, the mix had a Sharpe ratio of 0.30 and CAGR of 3.31%, compared with 0.32 and 4.59% for a buy-and-hold SPY benchmark. The article attributes the relative underperformance to transaction costs from monthly liquidation and bond fund returns lagging equities in the later years, while noting that bonds cushioned losses in 2008. Results depend on this historical period and the stated assets; the piece does not establish that the allocation will outperform or reduce risk in other conditions. It suggests testing tolerance-band rebalancing and alternative ETF mixes.

Key ideas

• A fixed 60/40 allocation can be implemented by liquidating and repurchasing holdings at each month end.
• Position sizing can translate current portfolio equity and target weights into whole-share orders.
• The reported backtest underperformed buy-and-hold SPY on CAGR and had a slightly lower Sharpe ratio.
• Monthly turnover can add transaction costs, while bond exposure may cushion some equity declines and detract in other periods.
• Rebalancing thresholds and alternative asset mixes are proposed as areas for further research.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.