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Old 10-26-2007, 07:05 PM   #21
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I can honestly say I've never once bought or sold anything in response to what the markets are doing, in my whole 5-year career as a serious investor

I don't invest in REITs because we already own a house in San Diego that's had a huge run-up in value (thankfully it wasn't in a fire zone) and its equity is dominating our portfolio (it's a rental, not our primary residence).

I'm also not in bonds, because we're young and we're planning on DH's military pension to kick in, which I'm counting as future bonds. However, I will probably start putting some money into bonds (I will start getting a salary soon) because I believe in the research that says up to 20% bonds will add stability and not substantially decrease performance.

Aside from some cash, that leaves US and foreign stock. And of those I guess I feel my allocations are very rough, and it would be hard to get very far outside the ballpark range of what seems ok. Perhaps this is too cavalier. At this point, we are still very much in savings mode, so when I do my once-per-year check and I want to raise an allocation, I shift our monthly savings transfers accordingly.
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Old 10-27-2007, 01:23 PM   #22
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That's a good point - there's a big difference between 'straying' by reacting to a big movement in the market and 'straying' by thinking you can see into the future.



Thats not a bad concept, but 5% seems very low. (I assume that's 5% off the target position not 5% of the portfolio.)
The "rule" I have seen is 5% of your portfolio for assets which are a significant part of your portfolio - say 20% of the total. So you would rebalance once outside 15 or 25%. For small assets you rebalance when it is off by 25% of the target allocation, so for something that is targeted at 5% then rebalance when outside 3.75% (5% - 5*0.25) or 6.25% (5% + 5*0.25). Personally I use the latter only as my portfolio is sliced and diced to the point that no one asset is bigger then about 10% of my total.

As I'm accumulating I don't sell anything, just add to the lagards. This summer was a good learning experience for me in this passive approach. After much research (stealing ideas from here and elsewhere ) I set my AA. I was way too low on total international, ISC, IV. Many pundits were saying these asset classes were way overpriced, had had their run would wait etc. I took the plunge anyways (reciting the mantra over and over again). Those assets have since been the driving force for the growth of my portfolio...

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Old 10-27-2007, 03:13 PM   #23
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The "rule" I have seen is 5% of your portfolio for assets which are a significant part of your portfolio - say 20% of the total. So you would rebalance once outside 15 or 25%. For small assets you rebalance when it is off by 25% of the target allocation, so for something that is targeted at 5% then rebalance when outside 3.75% (5% - 5*0.25) or 6.25% (5% + 5*0.25). Personally I use the latter only as my portfolio is sliced and diced to the point that no one asset is bigger then about 10% of my total.
for me 5% is by major asset class, stocks/bond/cash.

If I end up with stocks at 35% of the total portfolio I will then re-balance to get back to stocks being 40% of total. I only rebalance between small/mid/large US/International etc once a year
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Old 10-27-2007, 03:29 PM   #24
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My bands are even tighter. I subtract the difference between stocks versus bonds/cash from their target allocation. So for me if say stocks go to 62.5% and bonds/cash to 37.5%, that's a 5% difference and enough to trigger rebalance.

That may seem tight, but it usually takes quite a bit of a market move or a long time to trigger such an event, probably somewhat due to the extra little tax-friendly rebalance tweak I make below.

I selectively reinvest distributions. If some of my funds have way outperformed for a given year, I take the distributions in cash. Otherwise I reinvest. This is to minimize the tax ramifications of selling something to rebalance.

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Old 10-28-2007, 11:52 AM   #25
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Truman Clark, of DFA, examined the issue of rebalancing in detail in three papers published online in Fall of 2001. He concluded that, "the proposition that a rebalancing strategy can increase expected return is dubious," and that "rebalancing costs definitely reduce expected returns."

Evanson Asset Management - Asset Allocation Rebalancing and Long-Term Investment Return Information
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Old 10-28-2007, 12:47 PM   #26
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Interesting article, HFWR, thanks for posting it.

This factoid is worth remembering:

Quote:
Twice in the last century, 1900-1999, the S & P 500 lost approximately 65% of its value, adjusted for inflation and/or deflation, and took 15 years to produce a mere breakeven in returns.
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Old 10-28-2007, 05:34 PM   #27
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Truman Clark, of DFA, examined the issue of rebalancing in detail in three papers published online in Fall of 2001. He concluded that, "the proposition that a rebalancing strategy can increase expected return is dubious," and that "rebalancing costs definitely reduce expected returns."
Many of us use AA as a method for reducing volatility, and/or a technique for increasing the risk-adjusted return. It's not a method for maximizing return.

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Old 10-29-2007, 11:12 AM   #28
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HFWR, thank you. great link.
Here's the link to the Truman Clark document - worth reading though it is a bit long.
http://www.dbpaustin.com/pwm/TrumanClarkRebalancing.pdf

Truman discusses the real world implications of rebalancing - something that the research papers do not take into account and are, for the most part, specific to each individual's situation.

Audreyh1 - he talks about what you mention too & considers it a sound reason for AA.

I found the paper worth reading - now to figure out how to put it into practice!
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