Does Portfolio Rebalancing Create Value in an Emerging Equity Market? Evidence from Alternative Rebalancing Rules in Nigeria.

Abstract: An investor who sets a target mix of shares and safer assets must decide how often to restore it. This paper compares six rebalancing rules for a portfolio split equally between the Nigerian All-Share Index and twelve-month bank deposits: never rebalance (buy-and-hold), rebalance monthly, quarterly or annually, or rebalance only when the equity weight drifts more than 5 or 10 percentage points from target. Using monthly Central Bank of Nigeria data for

cent a year, against 9.27 per cent for buy-and-hold), the smallest maximum drawdown (35.8 per cent against 44.9 per cent) and the highest Sharpe ratio. All rebalancing rules beat buy-and-hold, and the less frequent rules beat monthly rebalancing. Trading costs of up to 100 basis points per unit of weight traded barely change these rankings. The same pattern holds for 30/70 and 70/30 target mixes and for a lower-yielding savings-account safe asset, and annual rebalancing also delivered higher growth in eight of ten overlapping ten-year holding periods, although a smaller drawdown in only three. However, the advantage is not uniform over time: buy-and-hold did best in 2020–2025, when equities rose almost without interruption. A block bootstrap gives a 95 per cent interval of −0.6 to +3.5 percentage points a year for the advantage of annual rebalancing over buy-and-hold, so the gain is suggestive rather than statistically established. All strategies lost purchasing power after inflation. The evidence favours disciplined, infrequent rebalancing for Nigerian investors, mainly because it limits drift towards equities before crashes.

Keywords: portfolio rebalancing; asset allocation; buy-and-hold; transaction costs; emerging markets; Nigeria

JEL classification: G11; G12; G17