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Did rebalancing help?
Old 03-20-2009, 01:58 PM   #1
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Did rebalancing help?

I've read a lot of threads decrying the return in the equities market over the last decade or so as an example of why AA doesn't work. I personally spent that time with my money in the tender care of a commission based FA, so I'm sure I made tons of money over that period.

However, those of you who have been doing AA for a while, did you really lose all the money you had made (on paper) during this period? In other words, even though the S&P is about where it was 12 years ago, if you've been rebalancing regularly it seems you should have beat the market over that time, harvesting winners and buying low.

Is this accurate, or am I missing something? Or is that already built into the equation? It doesn't seem so. I'm going to be doing this going forward, and I'm curious about how it's been working in real life.
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Old 03-20-2009, 02:02 PM   #2
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In the tech-led 2000-2002 bear market, rebalancing worked in a big way. While the Naz was dropping 75% and the S&P was dropping 50%, small cap value was up sharply, REITs were up sharply, emerging markets were up a bit and gold miners went through the roof.

As I had all of these in my AA and rebalanced annually, my total loss from 2000 to 2002 was about -10%, compared to something like -40% on the S&P 500. In 2002 in particular, when the S&P 500 was down 22%, I was down 5.4%.

As a result, I'm only back to about early 2003 levels, not 1997 levels -- even if I strip out new contributions since the bear started.

This bear, on the other hand, is a whole 'nother story. I could be wrong, but I think we may be getting close to the stage in this bear market where we're going to start seeing at least *some* significant diverge in equity asset class performance. So far it's barely mattered on the way down, but I'm seeing signs in the market that there seems to be less movement in lockstep.
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Old 03-20-2009, 02:55 PM   #3
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Sometimes it helps, sometimes it hurts but generally over the long term it helps with yield - a little. It is mostly a risk management strategy so you don't end up overweighted in any one asset class and subject to large losses. I agree with ziggy about the correlations becoming less than 1.00 as I find that I am having to redirect new money into different classes each month.

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Old 03-20-2009, 03:09 PM   #4
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I was regularly selling stock fund shares and buying bond fund shares during the 90's and in reverse during 2000-2002.

I had a return of -16.25% last year and -7.2% so far this year. My returns during 2000-02 were -2.6%, -4.4% and -11%.

However, IRR over last 12 years is 6.5% and over last 10 years is 3.3%. I've personally re-balanced 3 times in the last 18 months and I assume the manager of the Wellesley fund shares I own has re-balanced several times to maintain that funds stated objective, so I still strongly believe re-balancing to a target allocation works.
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Old 03-20-2009, 03:45 PM   #5
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I usually "rebalance" by directing new purchases to the most underweight asset classes. Last year I was down 37% on a portfolio that is 100% equities, 1/2 domestic and 1/2 international (down 38% and 44% for their broad indexes, respectively). So I beat both indexes for the year, but I was also directing contributions to a few asset classes that were 2/3 off at some points last year, and those have outperformed relative to the rest of my portfolio and the broad market (emerging markets comes to mind).

In general, my strategy has me buying the most depressed asset classes at any given time. My latest purchase was US small cap value, which I was way underweight on and I noticed it had dropped about 10% more than the broad US market.

From my vague recollections, in most recent years I performed about as well as the US market in the worst years and outperformed by a decent amount in the best years.

I'll also add that I have a huge allocation to international, emerging markets, small, small value, value, intl value, etc compared to the broad markets and the typical portfolio I see here, so generally I expect more volatility in each asset class but (hopefully) slightly higher long term returns and some overall volatility dampening from owning what remains to be non-perfectly correlated asset classes.
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Old 03-20-2009, 04:33 PM   #6
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What do you mean "beat the market"? If I was allocated into passively-managed index funds of equities and bonds over the last 12 years, I think rebalancing give one no more than a 1% edge the market of equities and bonds with my same asset allocation.

If you mean beat the S&P500, well, that's a completely different benchmark usually used by financial advisors when it suits them.
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Old 03-20-2009, 11:20 PM   #7
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What I mean is that when people/pundits talk about the market (whichever index) being down a certain amount, or down to 1997ish levels, aren't they talking about what you would have if you had put say $10K into that index, reinvested dividends, and otherwise left it alone? But if you had put in your $10K, reinvested dividends, and rebalanced that index along with all your other $10Ks in other indexes, wouldn't you be in better shape than what they are showing?

Of course, I guess that works the other way too. If the market is only going up, you'd lag the index a little because you'd be taking money off the table each rebalance, and putting it into a lower performer. I guess there's really no way to tell where you stand, other than by tracking your own real time performance over time. Or maybe there are ways to do these kinds of calculations, and I just don't have the math.
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Old 03-21-2009, 05:13 AM   #8
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rebalancing works when markets slide downward and other asset classes rise but dosnt work well in extended downturns or extended bull markets in an asset class .

your selling the winners to soon and adding money to whats still loosing...

there really isnt a firm answere, depends where you are in the scheme of things
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Old 03-21-2009, 08:29 AM   #9
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Quote:
Originally Posted by harley View Post
What I mean is that when people/pundits talk about the market (whichever index) being down a certain amount, or down to 1997ish levels, aren't they talking about what you would have if you had put say $10K into that index, reinvested dividends, and otherwise left it alone? But if you had put in your $10K, reinvested dividends, and rebalanced that index along with all your other $10Ks in other indexes, wouldn't you be in better shape than what they are showing?

Of course, I guess that works the other way too. If the market is only going up, you'd lag the index a little because you'd be taking money off the table each rebalance, and putting it into a lower performer. I guess there's really no way to tell where you stand, other than by tracking your own real time performance over time. Or maybe there are ways to do these kinds of calculations, and I just don't have the math.
I don't re-balance within an index I re-balance between indexes of asset classes. I might have 50% in VG Total Stock Market and 50% in VG Total Bond Market.

If they say the market is back at 1997 levels then if I had put $10K in the total stock fund and not touched it then I would expect to have $10k in it now. However, I would have had 10K in bonds in 1997 and each year I would have moved some money between the 2 funds to maintain my 50/50 split so it would depend on the rise and fall of both funds as to how much I had today - it could be more than 20k or less, but would be split 50/50.

SIMPLE example (that I'm sure to mess up):

Year one stocks go up 10% and bonds stay flat, you make 1,000 and move 500 to bonds at end of year.

Year two stocks go up 10% and bonds stay flat, you make 1050 on stocks and move 525 to bonds.

Year three stocks go down 17% and bonds stay flat, you lose 1,654 on stocks and your total in your stock fund is $9,371 and in your bond is is $11,050 for a total of $20,421.

If you had never re-balanced your stocks would be at $10,043 and bonds still at $10,000 giving a total of $20,043.
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Old 03-21-2009, 08:38 AM   #10
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Originally Posted by DblDoc View Post
Sometimes it helps, sometimes it hurts but generally over the long term it helps with yield - a little. It is mostly a risk management strategy so you don't end up overweighted in any one asset class and subject to large losses. I agree with ziggy about the correlations becoming less than 1.00 as I find that I am having to redirect new money into different classes each month.
I have the same take on rebalancing, but the various recommendations that I've read are either mostly theoretical or are based on historic or Monte Carlo modeling which may or may not pan out.

The one consistent theme I hear is not to rebalance too often or with too light a trigger; let them ride a year or two or more before touching up.
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Old 03-21-2009, 10:21 AM   #11
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I've done plenty of rebalancing in the past two years, but the one that sticks out was selling some of my energy funds when they were +20% of target (so they were 12% of portfolio instead of 10%), bringing them back to target, and then not long after that buying more energy shares when they fell to -20% of target. Sold high and bought back low, had cash left over to put elsewhere.

Rebablancing is only supposed to contribute about a 1% per year boost, so you may not notice it short term. Certainly in terms of cash/equities the gains have yet to be realized.
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Maybe It Helps
Old 03-26-2009, 11:25 PM   #12
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Maybe It Helps

This is my first post and I am going to do something I should NOT do, math. I used the returns + dividends from the Yahoo site for VTSMX and VBMFX and it seems from Jan 98 to today rebalancing on the first of Jan every years does make you a little more in the end.

50-50
Without Rebalancing

$10,000 in VTSMX in Jan 1998 gets you $10,642 today.
$10,000 in VBMFX in Jan 1998 gets you $18,294 today.
Total of $28,937

Rebalanced Every Jan
$10,000 in VTSMX in Jan 1998 gets you $15,105 today.
$10,000 in VBMFX in Jan 1998 gets you $15,000 today.
Total of $30,105


70-30
Without Rebalancing

$14,000 in VTSMX in Jan 1998 gets you $14,900 today.
$6,000 in VBMFX in Jan 1998 gets you $10,976 today.
Total of $25,876

Rebalanced Every Jan
$14,000 in VTSMX in Jan 1998 gets you $18,768 today.
$6,000 in VBMFX in Jan 1998 gets you $7,987 today.
Total of $26,755

So it seems like either of these typical allocations make you a little more since Jan 1998 if you rebalanced annually.

But then I could be COMPLETELY WRONG!

GM
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Old 03-27-2009, 12:37 PM   #13
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I agree with DblDoc on the risk management benefit.

Frankly, I think that balanced funds, for most people, are great because they
take the emotional out of rebalancing. And, for after tax money, they avoid
creating "taxable events" that would otherwise occur.

In my case, we have settled on the Vanguard Managed Payout and Distribution
fund for our taxable account and have elected to reinvest until we need the
payout. I also use this fund along with Wellesley, some inflation indexed bonds,
GIM and the Vanguard Investment Grade Corporate fund in my IRA.

Cheers,

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Old 03-27-2009, 12:50 PM   #14
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I agree with DblDoc on the risk management benefit.

Frankly, I think that balanced funds, for most people, are great because they
take the emotional out of rebalancing. And, for after tax money, they avoid
creating "taxable events" that would otherwise occur.
How? Funds are just conduits. If they realize CGs to rebalance, those CGs get allocated to each taxpayer fund-holder. If they rebalance when neither asset class has increased, no CG.

Same if you hold the two funds separately. If you rebalance because something has gone up, you geta CG. If on the other hand you rebalance because they have both gone down, but one more than the other, no CG.

Where does the tax benefit enter? I must be missing something.

Ha
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Old 03-27-2009, 01:11 PM   #15
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HaHa, I did not mean to imply there was a tax benefit to owning balanced funds.

I said you will avoid "taxabe events". That is, transactions that require
IRS reporting regardless of profit or loss.

I like to keep my tax reporting as simple as possible.

I hope this reply is an adequate response.

Cheers,

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Old 03-27-2009, 02:14 PM   #16
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HaHa, I did not mean to imply there was a tax benefit to owning balanced funds.

I said you will avoid "taxabe events". That is, transactions that require
IRS reporting regardless of profit or loss.

I like to keep my tax reporting as simple as possible.

I hope this reply is an adequate response.

Cheers,

charlie
OK Charlie, thanks, I understand.

Ha
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Old 03-27-2009, 08:36 PM   #17
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Originally Posted by Jsut View Post
This is my first post and I am going to do something I should NOT do, math. I used the returns + dividends from the Yahoo site for VTSMX and VBMFX and it seems from Jan 98 to today rebalancing on the first of Jan every years does make you a little more in the end.

50-50
Without Rebalancing

$10,000 in VTSMX in Jan 1998 gets you $10,642 today.
$10,000 in VBMFX in Jan 1998 gets you $18,294 today.
Total of $28,937

Rebalanced Every Jan
$10,000 in VTSMX in Jan 1998 gets you $15,105 today.
$10,000 in VBMFX in Jan 1998 gets you $15,000 today.
Total of $30,105


70-30
Without Rebalancing

$14,000 in VTSMX in Jan 1998 gets you $14,900 today.
$6,000 in VBMFX in Jan 1998 gets you $10,976 today.
Total of $25,876

Rebalanced Every Jan
$14,000 in VTSMX in Jan 1998 gets you $18,768 today.
$6,000 in VBMFX in Jan 1998 gets you $7,987 today.
Total of $26,755

So it seems like either of these typical allocations make you a little more since Jan 1998 if you rebalanced annually.

But then I could be COMPLETELY WRONG!

GM
I did not check your math, but I suspect it is correct. I've looked at this before and I tend to see the same thing - some advantage but not "WOW!".

I think it makes sense to rebalance though. After all, you chose a certain AA to match your risk tolerance, so why not stick to it? It's mechanical, so it helps keep emotion out if it. Although there was a recent thread where people were feeling anxious about rebalancing with all the current uncertainty. So it can't take all the emotion out of it, but these have been extreme times.

Good info, thanks for posting it.


-ERD50
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Old 03-28-2009, 07:43 AM   #18
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Just for comparison, I don't rebalance on any schedule but just let the winners ride until I feel like they are correctly valued and then I sell some/all and hold cash/equivalent until I find something else to buy in to, or I buy back into the same stock if I still like the fundamentals.

I am doing this with individual stocks, not funds, so my risk could be higher if I get it wrong, but so far I'm back to 4/2006 levels after the latest runup in the market vs. about 6-7 years of non-performance on the sp 500. I'm not real happy with that, but it is better.

FWIW I started doing this while still working and am only recently retired, and I'm not really sure if I have the stomach to keep doing it now that I really NEED the money to live on. However, the long 6-7 year span of overall market (sp 500) non-performance gives me pause of doing the market proxy thing and the cooresponding drop in almost all asset classes gives me more pause about the standard diversification thing.

I'm thinking about keeping 25-50% in the one publicly traded company that I think I know enough about, 25% into rental real estate for cash flow/hard asset/inflation hedge, and the rest in cash/equivalents for safety and opportunities.
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Old 03-28-2009, 10:34 AM   #19
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I'm thinking about keeping 25-50% in the one publicly traded company that I think I know enough about, 25% into rental real estate for cash flow/hard asset/inflation hedge, and the rest in cash/equivalents for safety and opportunities.
Americredit? AutoNation? CarMax?

Where will you put your chips?

Ha
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Old 03-28-2009, 10:51 AM   #20
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So it seems like either of these typical allocations make you a little more since Jan 1998 if you rebalanced annually.
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Originally Posted by ERD50 View Post
I did not check your math, but I suspect it is correct. I've looked at this before and I tend to see the same thing - some advantage but not "WOW!".
What's missing from the calculation is the path you took over 10 years to get to these results. By your math, rebalancing resulted in a modest improvement in returns (4.2% annually vs. 3.8% for a 50/50 portfolio) but the volatility of the rebalanced portfolio is substantially less.

Higher returns plus lower volatility =

(It also equals a greater chance of portfolio survivability)



Jsut, if you still have the spreadsheet where you performed the original calculations, could you post the standard deviation of the year-end balances for each of the portfolios? I think that would be illuminating.
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