Regular rebalancing

Rebalancing a portfolio once per year, either by buying and selling, or adding to investments that have become underweight can produce better returns than a passive strategy, provided:

• The elements of the portfolio have broadly similar expected returns. 50/50 cash/shares would do better by being left alone, since the shares (which should have better returns) would progressively dominate the portfolio. Property and shares should have broadly similar returns, so are good candidates for rebalancing.
• The elements are not perfectly correlated. Obviously with perfect correlation rebalancing is unnecessary.
• The market displays a certain amount of mean reversion. This is the key thing that makes rebalancing work - if future returns are unrelated to past returns, then rebalancing is pointless. But if a period of outperformance is typically balanced by a subsequent period of underperformance, then rebalancing can help -it also requires no insight into the relative valuation of the different asset classes.

I don't currently plan to pursue a rigorously balanced portfolio, but may do so at some stage. Currently my portfolio looks like this:

• 46% UK large cap.
• 25% UK small cap.
• 22% International large cap.
• 12% Emerging markets large cap.

I'm heavily weighted to the UK, mainly because of my familiarity with UK companies, and my preference thus far for avoiding index funds.

A more reasonable portfolio might look like:

• 20% UK large cap.
• 10% UK small cap.
• 15% US large cap.
• 20% International large cap.
• 15% Emerging market large cap.
• 20% Property.

I will be roughly tripling the size of my portfolio over the next 2 years, so my current holdings account for:

• 15% UK large cap.
• 8% UK small cap.
• 0% US large cap.
• 7% International large cap.
• 5% Emerging market large cap.
• 0% Property.

So to get the sort of balance I'm looking for, I should be avoiding UK shares almost entirely, and looking to pick up US shares and property as a first port of call.