The volatility harvest . why rebalancing pays
Two assets. Both end where they started. One path makes nothing. The other harvests ten percent.
Toy portfolio . start Rs 100 . 50 in Asset A and 50 in Asset B . one round-trip swing where each asset returns to its start price.
Step
Asset A move
Asset B move
Total Rs
Day 0
Rs 50. start
Rs 50. start
100
Day 1 swing
-30 pct . Rs 35
+30 pct . Rs 65
100
Buy and hold
A reverts to 50
B reverts to 50
100
Rebalance Day 1
buy A up to Rs 50
sell B down to Rs 50
100
Day 2 reversion
+43 pct back to start
-23 pct back to start
110
Buy and hold path: 100 to 100. Zero return on a flat round trip.
Rebalance path: 100 to 110. Ten percent harvested from the same swing.
The harvest is not luck. It is the discipline of selling what ran and buying what lagged, paid for by mean reversion.