Using Forecasts to Trigger Portfolios Rebalancing: Can Forecasts Reduce the Gap Between Expected and Actual Returns?

Abstract

This research finds considerable support for the notion that "buy and hold" investors will attain superior performance if they select portfolios using forecasted returns within the traditional mean variance approach. Portfolios comprised of the U.S . and five foreign i-Shares were generated using both historical and forecasted returns. Over the course of five holding periods, the portfolios generated using forecasted returns consistently outperformed those generated using the traditional mean-variance approach as well as the U.S. only, "home biased" portfolio. This suggests that buy and hold investors can attain the benefits of international diversification without the constant monitoring and rebalancing necessary to attain the expected performance of portfolios generated using historical returns.