Small Rebalanced Portfolios Often Beat the Market over Long Horizons

Abstract The distribution of long-run compound returns to portfolio strategies is greatly affected by periodic rebalancing. Over time, buy-and-hold portfolios gradually lose diversification as extreme skewness in individual stock leads increasingly concentrated holdings. For long investment horizons, small rebalanced holding only a fraction all stocks therefore achieve better than much larger marketwide portfolios. Consequently, over tend outperform portfolios, and risk-averse investors prefer the former. Empirical results strongly support theoretical predictions add further evidence strong empirical performance (small) equal-weighted (JEL G10, G11) Authors have furnished an Internet Appendix, which available on Oxford University Press Web site next link final published paper online.