Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Equity Rebalancing Bands?
Old 04-07-2013, 10:55 AM   #1
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 118
Equity Rebalancing Bands?

Ok, I have searched here and at bogelheads to no avail. I am trying to find out what should appropriate rebalancing bands be for my portfolio that contains no fixed income securities. I am invested in 3 broadly diversified national/international indexes for 33% a piece. Specifically, they are:

Vanguard Emerging Markets (VGEIEX): 33%

Vanguard Total Stock Market (VTSMX): 16.166%
Vanguard Developed Market (VDMIX): 16.166%

Vanguard Dividend Appreciation (VDAIX): 33%


Almost everyone who addresses rebalancing a portfolio talks about it within the context of allocation to equity vs fixed income. My question is, what should my rebalancing ranges be if I am invested only in equity funds?

I do want to allow some range as I do believe rebalancing will increase my overall return and lower risk (so long as I have a systematic plan in place that I follow).

So what do you all think? 5%...6%...7% less?
__________________

__________________
AndrewJackson is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-07-2013, 11:11 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
I tend to rebalance "judgmentally" - when I think the market or a segment of the market has had too good a run or is a little ahead of itself then I'll opportunistically rebalance. If "judgement" doesn't cause me to rebalance then normally I do it in the 4th quarter as part of my annual tax harvesting.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 04-07-2013, 11:25 AM   #3
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 118
Here is some more info:

In Excel, I downloaded all the fund information from yahoo since 2006. I calculated yearly returns every day up until the present. For each day I calculated what the portfolio asset allocation would be if you had invested at your target levels a year prior to that day. I then calculated the absolute value of the difference between actual portfolio %s and the target that I would have invested at 1 year prior. For each fund, I then got several statistics:

Average Change in Portfolio Allocation by % of portfolio over 1 year from 2006 to present calculated daily.

VGEIEX: 3.4%
VTSMX: 0.9%
VDMIX: 0.9%
VDAIX: 2.6%

Stdev of Change in Portfolio Allocation by % of portfolio over 1 year from 2006 calculated daily.

VGEIEX: 2.5%
VTSMX: 0.6%
VDMIX: 0.4%
VDAIX: 2.0%

Max Change in Portfolio Allocation by % of portfolio over 1 year from 2006 calculated daily.

VGEIEX: 11.0%
VTSMX: 3.0%
VDMIX: 2.0%
VDAIX: 9.5%

Remember these are all comparisons from my target %s of 33,16.66,16.66,33
__________________
AndrewJackson is offline   Reply With Quote
Old 04-07-2013, 11:32 AM   #4
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 118
Quote:
Originally Posted by Midpack View Post
I only check quarterly and use the 5/25 rule to alert when I've fallen outside of either. But I don't automatically rebalance on that basis, I also make a judgement considering tax impact, future AA goals, etc. And I would always use new money (in lagging asset classes) vs buying and selling where possible. Easy with working income, maybe less so in retirement depending on income sources.
My only issue with the 5/25 rule, is every time I see it mentioned on a forum it is from in the context of a bond vs stock allocation. I am not sure what is best within purely stock. The other thing is my data is over a volatile period, which would suggest wider bands than might be necessary.
__________________
AndrewJackson is offline   Reply With Quote
Old 04-07-2013, 11:51 AM   #5
Thinks s/he gets paid by the post
Gotadimple's Avatar
 
Join Date: Feb 2007
Posts: 1,758
Quote:
Originally Posted by AndrewJackson View Post
My only issue with the 5/25 rule, is every time I see it mentioned on a forum it is from in the context of a bond vs stock allocation.
You are correct.

I won't recommend a specific band, but would say that I don't use 25% anywhere. But if I have a volatile holding I'd set a higher band, like 15% to avoid frequent trading. Less volatile holdings that are a significant part of my allocation (your 33% above) would have a lower band like 5-7%.

How you set your bands needs to satisfy the SAN requirement: Sleep At Night.

You also need to decide how frequently you will monitor. For some it's annually.

-- Rita
__________________
Only got A dimple, would have preferred 2!
Gotadimple is offline   Reply With Quote
Old 04-07-2013, 11:55 AM   #6
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 118
Quote:
Originally Posted by Gotadimple View Post
You are correct.

I won't recommend a specific band, but would say that I don't use 25% anywhere. But if I have a volatile holding I'd set a higher band, like 15% to avoid frequent trading. Less volatile holdings that are a significant part of my allocation (your 33% above) would have a lower band like 5-7%.

How you set your bands needs to satisfy the SAN requirement: Sleep At Night.

You also need to decide how frequently you will monitor. For some it's annually.

-- Rita
It is actually kind of funny (but makes sense), the middle volatility holdings have less range than the lower volatility holdings (in terms of portfolio %). I think I might go with average Change in Asset Allocation % + 1-2 stdev for each holding.
__________________
AndrewJackson is offline   Reply With Quote
Old 04-07-2013, 12:38 PM   #7
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
Quote:
Originally Posted by Gotadimple View Post
I won't recommend a specific band, but would say that I don't use 25% anywhere. But if I have a volatile holding I'd set a higher band, like 15% to avoid frequent trading.
A 25% band is greater than 15% so I don't think I understand what you mean. Did you mean 25% relative versus a 15% absolute or 15% vs 5%?


Quote:
Originally Posted by AndrewJackson View Post
My only issue with the 5/25 rule, is every time I see it mentioned on a forum it is from in the context of a bond vs stock allocation. I am not sure what is best within purely stock. The other thing is my data is over a volatile period, which would suggest wider bands than might be necessary.
There's no reason the 5/25 rule wouldn't apply to an all equity portfolio. If you feel they are too narrow, I don't think it matters much if you increase them. Rebalancing needs to be traded off against transaction costs (to rebalance).
__________________
photoguy is offline   Reply With Quote
Old 04-07-2013, 01:45 PM   #8
Thinks s/he gets paid by the post
heeyy_joe's Avatar
 
Join Date: Nov 2012
Location: Madeira Beach Fl
Posts: 1,403
I like your allocations (based on your planned retirement year in your profile).
__________________
_______________________________________________
"A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do" --Bob Dylan.
heeyy_joe is offline   Reply With Quote
Old 04-07-2013, 02:20 PM   #9
Thinks s/he gets paid by the post
Ready's Avatar
 
Join Date: Mar 2013
Location: Southern California
Posts: 1,822
I have to ask...what is your theory for keeping 100% of your investments in equities? Are you exceedingly confident in the stock market, or just feel you have a long enough time horizon to ride out the ups and downs?
__________________
Ready is offline   Reply With Quote
Old 04-07-2013, 02:53 PM   #10
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 118
Quote:
Originally Posted by Ready View Post
I have to ask...what is your theory for keeping 100% of your investments in equities? Are you exceedingly confident in the stock market, or just feel you have a long enough time horizon to ride out the ups and downs?
Mainly because bonds prices are at world record all time lows in history. 32.5 bps on jgb 10 year, need I say more. Although my target retirement is 22 years or so from now, I don't plan on sitting on a beach but rather a change of lifestyle with the pursuit of a lower income more fulfilling career (maybe even financial counseling). So I don't really plan on dealing with withdrawal rates and living solely off my investments for a while.

Realistically, my true horizon is probably more like 30-40 years so I have all the time to ride the waves. Also, I am not starting out with huge amounts and will invest over time. Even if stocks lose 60-70 percent today, I have a decent chance of succeeding so long as we don't reach a permanently low plateau.
__________________
AndrewJackson is offline   Reply With Quote
Old 04-07-2013, 02:56 PM   #11
Thinks s/he gets paid by the post
Gotadimple's Avatar
 
Join Date: Feb 2007
Posts: 1,758
Quote:
Originally Posted by photoguy View Post
A 25% band is greater than 15% so I don't think I understand what you mean. Did you mean 25% relative versus a 15% absolute or 15% vs 5%?
I mean absolute in every instance.

Don't make re-balancing a convoluted science experiment. It needs to be simple. If a holding is 16% and I set a 5% band (in absolute references), then if the holding becomes 22% of my portfolio, I would want to sell enough to bring it back to an absolute 16%.

One needs to understand the basics of correlation. In the OPs case if his/her International fund increased to 22%, it is probable that the US Equities fund is down. He/She would sell enough International to restore it to 6% of the entire portfolio and invest the proceeds in another of his/her funds to bring it up to its' initial weighting, i.e., US Equites.
__________________
Only got A dimple, would have preferred 2!
Gotadimple is offline   Reply With Quote
Old 04-07-2013, 03:20 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Quote:
Originally Posted by AndrewJackson View Post
. . . I do believe rebalancing will increase my overall return and lower risk . . .
There's solid evidence that it reduces risk, but no consensus that it increases overall returns.

In simple terms, over time the riskiest assets (highest volatility) can be expected to provide higher returns. Thus, typically (not always) you'll be moving assets from classes of higher return to ones of lower return. If you didn't rebalance, over time your portfolio would become more and more concentrated in the asset classes with highest return (and highest volatility) and it would have higher performance than a more balanced portfolio. It would also have more risk, which is why everyone isn't invested 100% in the emerging market stocks.

The idea that rebalancing will improve overall portfolio returns by selling appreciated assets to buy ones at lower price sounds appealing and it does work to some extent, but (according to those who have researched it using real data) it does not overcome the drag caused by being invested in asset classes with lower expected returns. We should rebalance to bring overall risk back into line with our original allocation, we should not expect it to improve overall returns.

Yes, I rebalance approx annually. For reasons related to the paragraphs above, there's no particular reason to be especially fastidious about adhering to particular bands or schedules, just realize that the more your portfolio diverges from your target allocations, the more you should expect your performance (performance in downturns, overall return, etc) to diverge from those you had in mind when you established your initial allocation. I do think that a set rebalancing "discipline", whether it be % bands or (for the lazy among us) set by the calendar is important to try to keep things as mechanical as possible and avoid emotional decisions about whether a particular class is "hot" or not. I know I'm too lazy to run a Morningstar X-ray on my holdings every day to see if any sub-class has gotten above or below my targets, I just adjust everything once per year when I get ready do my December selling for tax purposes/CG harvesting, etc.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 04-07-2013, 03:53 PM   #13
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 118
Quote:
Originally Posted by samclem View Post
There's solid evidence that it reduces risk, but no consensus that it increases overall returns.

In simple terms, over time the riskiest assets (highest volatility) can be expected to provide higher returns. Thus, typically (not always) you'll be moving assets from classes of higher return to ones of lower return. If you didn't rebalance, over time your portfolio would become more and more concentrated in the asset classes with highest return (and highest volatility) and it would have higher performance than a more balanced portfolio. It would also have more risk, which is why everyone isn't invested 100% in the emerging market stocks.
I agree. Maybe should have said better sharpe ratio. I think the return you give up is more than made up by reduced risk. What I am hoping, though, is my rebalancing system might have some alpha compared to others' rebalancing systems by calculating historical high points in terms of difference from target asset allocation. Who knows if this momentum/reversal slack will work, but it is grounded in some logic and math.

Like you said the most important thing is to implement the plan and throw your emotions out the window.

Oh and before I forget, here are my tentative absolute rebalancing thresholds:

Total of VGTMX and VDMIX: +-3.5% from 33.33
VDAIX: +-5% from 33.33
VGEIEX: +-7% from 33.33

These are about average +1.5 stdev and they didn't change much when I ran my numbers based off of rolling 2 year returns. What you all think?
__________________
AndrewJackson is offline   Reply With Quote
Old 04-08-2013, 07:00 AM   #14
Recycles dryer sheets
racy's Avatar
 
Join Date: May 2007
Posts: 478
I put together a list of the various recommendations I could find, to wit:

1-3 yrs - Bob Clyatt
4 yrs - Jim Otar
2-5 yrs - William Bernstein
6.25 yrs - William Bengen
+/- 10% - Harry Browne
+/-10-15% Burton Malkiel
+/- 5% - Vanguard
+/- 10% or never - John Bogle

Take your pick!
__________________
The Big Lebowski: Are you employed, sir?
The Dude: Employed?
racy is offline   Reply With Quote
Old 04-08-2013, 12:16 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
I use 20%, which was an "optimum" I read about many years gone. That's a relative 20%, so if your target allocation is 33% you rebalance at an absolute 39.6% or 26.4%. I use a highly divided slice and dice all equity portfolio with no funds >5% of the total. The idea of the 20% was to wait long enough to capture some of the upside, but not so long that you miss the chance to rebalance altogether.
__________________
Animorph is offline   Reply With Quote
Old 04-08-2013, 12:32 PM   #16
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,031
Since I am still adding to my portfolio, I just add funds to the equity category that shows the largest negative deviation from target.
__________________

__________________
FIREd is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 02:07 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.