Evaluating Transaction Costs in Portfolio Rebalancing
Wainwright Investments is managing a multi-asset portfolio for a high-net-worth client who recently expressed concerns about market volatility and increasing transaction costs associated with their investment strategy. The chief investment officer (CIO) has proposed a strategy that includes more frequent rebalancing of the portfolio to maintain adherence to the target asset allocation while simultaneously minimizing transaction costs.
As part of this strategy, the CIO has tasked you with evaluating the various types of transaction costs, their potential impact on portfolio performance, and the implications of an increased trading frequency on both transaction costs and overall investment returns. The client currently holds equity, fixed income, and alternative assets. Provide a comprehensive analysis that addresses the following:
- Identify and discuss the different types of transaction costs.
- Evaluate how increased rebalancing could influence these transaction costs and the ultimate portfolio performance.
- Provide recommendations on how to optimize trading strategies to minimize transaction costs while ensuring that the portfolio remains aligned with the client’s investment objectives.