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It's not how often, it's how much.
Old 07-06-2005, 12:37 PM   #21
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It's not how often, it's how much.

Quote:
Originally Posted by Just not
Wab - maybe i'm dense (shaddup) but I thought the core premise behind rebalancing was taking away from asset classes that had 'run ahead' and putting the excess into the laggards.

It doesnt work if you have asset classes that 'never stop' or those that 'never rise' (aka energy/reits and japan for the recent term).* But like Ben I thought I had seen plenty of data that showed a rebalance every 2 years helped.

As soon as I manage to own a holding in anything for 2 years or more, I'll let you know.
I've been waiting for the "how often" debate to settle to a concensus, but it seems to be based on historical data. Not that we have anything better, but two years is a lot more tolerable than monthly.

However I thought it was based on asset allocation instead of time intervals. I wouldn't rebalance until asset allocation had drifted far enough away from the original plan to affect one's sleep. So if you're drawing your living expenses from the asset that's had the strongest runup, that tends to hold the AA near its original numbers.

Personally we've been drawing down Tweedy, Browne Global Value (TBGVX), our biggest % holding, and it's still going up faster than we're chewing into it. So I could see harvesting some of that if it rises to over 40% of our AA and putting it into a small-cap value ETF (or the proposed micro-cap value ETF). We've been letting our Dow Dividend ETF rise on its own without touching it-- in another 20 years or so I could turn into an income investor.

I don't know if I'm capable of selling Berkshire Hathaway shares. I have this irritating feeling that its breakup value is worth far more than its share price...
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Re: Don't waste your money rebalancing
Old 07-06-2005, 12:48 PM   #22
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Re: Don't waste your money rebalancing

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in another 20 years or so I could turn into an income investor.
We will all bow our heads and observe a moment of silence...
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Re: It's not how often, it's how much.
Old 07-06-2005, 02:58 PM   #23
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Re: It's not how often, it's how much.

Quote:
Originally Posted by Nords
I've been waiting for the "how often" debate to settle to a concensus, but it seems to be based on historical data.* Not that we have anything better, but two years is a lot more tolerable than monthly.
The "how often" debate will never stop because there is no right answer -- selling one asset and buying another doesn't "win" on any special periodic basis. Winning or losing using that strategy is pure luck. My portfolio would be *very* heavily weighted towards Japanese stocks if I followed an automatic rebalancing strategy for the past 20 years.
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Re: It's not how often, it's how much.
Old 07-06-2005, 03:23 PM   #24
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Re: It's not how often, it's how much.

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Originally Posted by wabmester
My portfolio would be *very* heavily weighted towards Japanese stocks if I followed an automatic rebalancing strategy for the past 20 years.
Would that be a bad thing?



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Re: It's not how often, it's how much.
Old 07-06-2005, 03:48 PM   #25
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Re: It's not how often, it's how much.

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Would that be a bad thing?
Yeah, it would have been pretty hard to retire early with a large exposure to an asset that declined for about 12 years straight.

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Re: It's not how often, it's how much.
Old 07-06-2005, 03:54 PM   #26
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Re: It's not how often, it's how much.

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Originally Posted by wabmester
Yeah, it would have been pretty hard to retire early with a large exposure to an asset that declined for about 12 years straight.

But you would have DCAd into the lows, and would be poised for the eventual rebound and windfall of profits, right?* Isn't that what the rebalancing thing is supposed to do for you?* What am I missing?

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Re: Don't waste your money rebalancing
Old 07-06-2005, 03:59 PM   #27
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Re: Don't waste your money rebalancing

Greetings Wabmester:
Quote:
My portfolio would be *very* heavily weighted towards Japanese stocks if I followed an automatic rebalancing strategy for the past 20 years.
But if you automatically rebalance, you wouldn't be capable of being over-weighted, unless you started your portfolio that way, and intentionally tried to keep it that way, I would have thought. That's one of its benefit. Or am I misunderstanding you?

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Re: It's not how often, it's how much.
Old 07-06-2005, 04:00 PM   #28
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Re: It's not how often, it's how much.

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Originally Posted by Patrick
But you would have DCAd into the lows, and would be poised for the eventual rebound and windfall of profits, right?* Isn't that what the rebalancing thing is supposed to do for you?* What am I missing?
In the case of Japan, you might be missing the fact that the rebound still hasn't happened. * *Your portfolio would have been flat over a 20-year period -- not exactly a market-beating strategy.

The bottom-line is that you don't know when an appreciating asset stops appreciating or when a depreciating asset stops depreciating, and you certainly don't know when the growth of one asset will surpass the growth of another. * *Of course, I could be wrong, and there is some magic reason automatic rebalancing should work over the long term. * I just can't imagine what it is.
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Re: Don't waste your money rebalancing
Old 07-06-2005, 04:03 PM   #29
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Re: Don't waste your money rebalancing

Quote:
Originally Posted by Bookm
But if you automatically rebalance, you wouldn't be capable of being over-weighted, unless you started your portfolio that way, and intentionally tried to keep it that way, I would have thought. That's one of its benefit. Or am I misunderstanding you?
The idea of rebalancing is that you pick your favorite asset allocation and rebalance when it gets out of whack, right? So, you sell your winners and buy more of your losers, right? If you pick a long-term loser that keeps depreciating over the long-term, the effect of rebalancing should be obvious: you will reduce your portfolio returns.

I'm not saying that such a scenario is likely, just that you are no more likely to improve returns than you are to reduce returns using such a strategy.
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Re: Don't waste your money rebalancing
Old 07-06-2005, 04:10 PM   #30
 
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Re: Don't waste your money rebalancing

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I guess I find it amusing that the same people who denegrate market timing also tout the benefits of rebalancing. There is no difference -- rebalancing is just one very simple-minded attempt at buying low and selling high.
Re-balancing is 'market timing' with a disciplined approach. Time and a Formula. A little different than waking up on a Tuesday Morning, mid-year and saying "I'm nervous - I'm pulling out of stocks"

But -- Have it your way. Re-balancing is Market timing. - Absolutely no difference. I know you like to win these arguments. So you win!
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Re: Don't waste your money rebalancing
Old 07-06-2005, 04:22 PM   #31
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Re: Don't waste your money rebalancing

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Originally Posted by Cut-Throat
Re-balancing is 'market timing' with a disciplined approach. Time and a Formula. A little different than waking up on* a Tuesday Morning, mid-year and saying "I'm nervous - I'm pulling out of stocks"
I'd like to think that there are smarter market-timing strategies than either automatic rebalancing or panic attacks.

Quote:
But -- Have it your way. Re-balancing is Market timing. - Absolutely no difference. I know you like to win these arguments. So you win!
I learn more by losing arguments than I do by winning them.* *I'm mostly just curious about what sort of meat is on the bones of some of these "disciplined" strategies derived from limited historical data.* * Discipline is a Good Thing when applied to proven strategies.* *Discipline can be dangerous when applied to questionable strategies.
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Re: It's not how often, it's how much.
Old 07-06-2005, 04:36 PM   #32
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Re: It's not how often, it's how much.

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Originally Posted by Patrick
But you would have DCAd into the lows, and would be poised for the eventual rebound and windfall of profits, right?* Isn't that what the rebalancing thing is supposed to do for you?* What am I missing?Patrick
You are missing that this "eventual rebound " was not part of the Sermon on the Mount. Also, that 25 years is*along time. Certainly the period where one transitions from relative youth to late middle age.

Not to mention that -horrors-what if Japan is in a secular, civilizational decline? China seems ascendant in that part of the world. Maybe China has not forgiven and forgotton their humiliation at the hands of the Japanese during the '30s and '40s?

I have wondered what Japan's eventual place might be in Asia. The Chinese won't allow them to be overlords in Chinese factories for long. Just long enough to steal the skillsets.

I can't see them playing the role of Switzerland, as high class bankers, insurers, etc. Switzerland never went around their neighborhood raping everyone and burning down cities.

Maybe Japan is just screwed?

At least maybe one who had "rebalanced" into Japan for 25 years might wake up one night and be very worried about that possibility.

IMO, Wab has it right. "rebalancing" is just a simple minded form of market timing, based on a vague feeling that what goes up must come down, and vice-versa. The first part is probably correct, given a super human time span. But the second-- don't bank on it!

Ha
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Re: Don't waste your money rebalancing
Old 07-06-2005, 04:52 PM   #33
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Re: Don't waste your money rebalancing

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Originally Posted by Cut-Throat
But -- Have it your way. Re-balancing is Market timing. - Absolutely no difference. I know you like to win these arguments. So you win!
By any sort of functional definition, anytime you sell one aggregate and buy another, you are market timing. The rest is just detail-what method are you using?

IMO, some things are worth discussing, even if there are varying viewpoints. Investment technique is one such thing.* We have to be using a model that is reasonably well matched to the environment if we expect to prosper.

It may be worse to be very confident in a mis-matched model than to be quite unsure of oneself.

ha
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Re: Don't waste your money rebalancing
Old 07-06-2005, 05:08 PM   #34
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Re: Don't waste your money rebalancing

Hmmmm

Vanguard Lifestrategy mod - when I get 'old' in maybe in 5-10 yrs - after intense study and thinking - switch to Lifestrategy cons. Meanwhile auto deduct the divs/interest to my Norwegian widow account. I believe the - heh, heh - rebalacing computers at Vanguard are still running - possibly as I post this.

Or course - if the strain of study, think, study produces no great insight - may just throw in the towel - switch to Target Retirement Series and avoid the decision altogether.

? Does computer rebalancing count?
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Re: Don't waste your money rebalancing
Old 07-06-2005, 06:12 PM   #35
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Re: Don't waste your money rebalancing

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? Does computer rebalancing count?
Sure does. If WAB had a faster computer, he'd be able to rebalance properly and make money
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Re: Don't waste your money rebalancing
Old 07-07-2005, 03:14 PM   #36
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Re: Don't waste your money rebalancing

I'm not trying to argue this issue, this is my first chance to respond. I'm just stating my beliefs based on what I've learned, and why I do what I do, of which no one can say otherwise.

The main purpose I rebalance using thresholds is risk management. I am avoiding excess risk by rebalancing, thus protecting against the possibility of incurring huge losses. An attempt to slightly juice returns is also partly an issue, but certainly not the predominant issue for me. Most here are aware of the various studies which have indicated investors are able to reduce risk by diversifying across multiple asset classes. There is the potential in many cases, where an unbalanced portfolio can leave one's holdings extremely undiversified, unnecessarily increasing the risk in one's port.

I can think of a Bernstein article a few years back that I believe tackled the issue somewhat. While there was found to be only fractional differences in returns among rebalancing periods, the greater risk was incurred by the portfolios which waited the longest to rebalance. So returns were not a real major issue, but controling risk is, IMHO.

Also a few years back, Truman Clark from Dimensional Fund Advisors* wrote a piece, Efficient Portfolio Rebalancing, came to a similar conclusion, that standard deviation increases in non-rebalanced portfolios. I also read an article a few months back in the FPA Journal stating similar points.

So while those like myself may seem "simple-minded" for using a questionable strategy, there is actually a thought process, and a valid reason for my rebalancing.

Bookm
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Re: Don't waste your money rebalancing
Old 07-07-2005, 05:28 PM   #37
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Re: Don't waste your money rebalancing

This article seems to have some data that supports Bookm's position.

http://www.fpanet.org/journal/articl...1001-art14.cfm
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Re: Don't waste your money rebalancing
Old 07-07-2005, 11:03 PM   #38
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Re: Don't waste your money rebalancing

I am with Bookm - reducing risk is the main reason why I re-balance - it if ALSO adds to the returns that is of course great, but that might be neglible or a toss up. Cheers!
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Re: Don't waste your money rebalancing
Old 07-08-2005, 02:54 AM   #39
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Re: Don't waste your money rebalancing

I'm all for reducing risk, but blind automatic rebalancing certainly isn't guaranteed to do that. For example, if in a given year bonds outperform stocks, the "disciplined" rebalancers will add more stocks to their portfolio, and therefore add more volatility. I'm not saying that the strategy is nuts, only that it doesn't guarantee anything good will happen either in terms of risk or returns. All it promises is that you'll maintain your particular asset mix. Personally, I change my asset mix for a variety of reasons. I value flexibility over adherence to some fairly arbitrary strategy.
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Re: Don't waste your money rebalancing
Old 07-08-2005, 07:27 AM   #40
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Re: Don't waste your money rebalancing

Big stretch here - I change my rebalancing rules for two reaasons: tick of time - as I get older - lower the stock percent of portfolio ala the classic pie chart, and two - add asset classes at the edges as required to boost div/interest of overall portfolio to 'acceptable' level - 3-4% currently with the level subject to review.

More two cents: If you are in the accumulation phase and insist on rebalancing - I would think - expected long term growth of your selected asset classes would be first, correlation as a means of smoothing ride and perhaps rebalancing if you feel volitility has exceeded your emotional comfort level - ie a tad fixed income.

If you are in ER - try to damp the swings/volitility to be able to remove money easier - while still getting livible expected growth. Div/interest as a backstopper helps here.

International, fixed income classes, REITs, PM, natural resources, and my least mentioned favorite - regulated utilities are there to mix and match. Hot rodders - have timberland, rental property, MLP's, certain closed end funds and other exotica.

Of course - a single fund - like Vanguard Target Retirement Series if you don't like 24/7 market thinking and have other things to do.

Or Wellington/Wellesley combo if you need part time work to keep busy - the mix based on you point in the accum./distr. cycle.
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