Once a portfolio has been designed and implemented, what happens next? Studies show that asset mixes as well as proper rebalancing are keys to successful ROI. However, a portfolio based on certain historical statistical and financial analysis during a specific period in the past may only be valid for an indeterminate length of time. Macro and micro economics and their accompanying market conditions are continuously changing. So, how does an investment manager decide when it’s time to rebalance a portfolio?

Having a strong research and development presence is an extremely important part of any serious investment management effort. The most important theoretical concept underlying portfolio management today – Modern Portfolio Theory (MPT) — is a work-in-progress.

Since Harry Markowitz published his revolutionary paper in 1952 which eventually led to the development of a whole new branch of finance and a Nobel Prize four decades later, Modern Portfolio theory (MPT) has played an important part in investment management. However, what Modern Portfolio Theory promised in its genius of the Efficient Frontier was never borne out in its ability to produce practical portfolios. The failure is mainly due to certain unrealistic assumptions within Markowitz’s solution to the asset allocation problem. More specifically, ...