What is the primary benefit of employing a threshold approach in rebalancing?

Using a threshold approach in rebalancing is primarily beneficial because it maintains control based on market performance. This method involves setting specific thresholds that trigger rebalancing actions when an asset class deviates significantly from its target allocation. By defining these thresholds, investors can avoid making hasty decisions based on short-term market fluctuations, thus allowing for a more disciplined approach to managing their investment portfolio.

The threshold approach helps in maintaining the desired asset allocation, ensuring that the portfolio adheres to the investor's risk profile and long-term investment strategy. This method effectively balances the portfolio without the frequent trading that can lead to higher transaction costs and market timing risks. By relying on predefined criteria, the investor can reduce emotional biases that might affect investment decisions, as they are following a systematic approach instead of reacting impulsively to market changes.

Furthermore, while this method does not guarantee the elimination of transaction costs, adjustment for emotional investments, or securing positive returns, it is a structured approach that emphasizes maintaining asset allocation control relative to market performance. This systematic method aids in making more rational investment decisions, contributing to long-term investment success.