Even among those alternatives that held up relatively well, another important complication arose when investors ran into liquidity issues. When it would have been a good time to rebalance, assets in many of these programs were not available to make the needed buys. Many of the management teams of these programs will correctly point out that the lack of access was a contributing factor to their strategy's survival, but one needs to be able to execute the needed transactions cheaply.
Even less exotic holdings can be an issue. Early withdrawal fees on CD's, surrender penalties in fixed annuity products, and the paperwork associated with making a change can also be obstacles to executing efficiently.
While the identities of A and B are critical to providing the ability to rebalance, the identities also impact one's willingness to act as the rebalancing discipline requires.
It is almost as predictable as the tides. When markets become volatile, the reaction is the same. The media and the public pay more attention to the markets. The stories become those of dour conditions, devastating losses, and an uncertain future. Extreme gloomy predictions get more attention as they seem more realistic. The papers put a photo of a floor trader with a look of anguish and exhaustion on the front page after down days. Anxiety rises, the infamous "this time is different" reappears, and many entertain the notion that things will never be better or at least won't get better anytime soon.
There is the heart of the willingness issue. Mathematically, rebalancing in down markets improves the result when the asset that is bought rises above the level at which the buy occurs. In the minds of many, the issue becomes if the asset will rise.
Just because something has always happened does not mean it will again and just because something has never happened does not mean it won't.
After a dramatic decline, one's conviction about the components of a portfolio will be tested. If B is the stock of a single company, for example, how can one be confident that it will rebound? Companies go bankrupt even in good times. Many of the darlings of the tech world are gone and many others, over a decade after the bust, are still a long way from rebounding. When Cisco dropped to $50 a share, I hope no one rebalanced to it.
Most advisors minimize or eliminate the risks of such concentration but I see many make a potentially disastrous mistake by holding assets whose rebounds are also suspect, particularly in the alternative arena. What drives the returns in many of these vehicles? Is it management's trading talent? Is that really something upon which one can rely? Maybe, maybe not.
At least with a position in broadly diversified equities or bonds, there are sound, proven reasons to expect a return. Bond owners are due interest and principal and stockholders have a claim on profits. Neither assures a good result, of course, but in the aggregate, diversified holdings of stocks and bonds have paid off better than the products designed to add return by trading in such securities.
Most clients don't think about the expected returns of their holdings the same way good advisors should. They worry about the next 'black swan" the people on TV are talking about, never really knowing what that means. I can't say I blame the public for this considering most commentators ignore Taleb's characterization that black swan events are unpredictable and rare when making their predictions.