... I did a rough & tumble stab at a spreadsheet to back test the effects of rebalancing, and the results seemed inconclusive to me...
One thing in my study made me very suspicious - I analyzed with incrementally increasing % delta points to trigger the re-balance, and the results did not vary smoothly at all. Instead of steadily increasing, and then decreasing at some point, the returns jumped one way or the other at certain "magic numbers". So I really suspect that was just data-mining (the bad kind), and it told me which % points hit the optimal peaks/troughs that occurred in that particular data set.
No, I do not have any proof of my own, nor have seen any in literature. I jumped to the above conclusion by seeing that the S&P500, Dow, and Nasdaq went through big gyrations in the last 10 years, and told myself that there were plenty of opportunities to buy low and sell high. In addition, there are anecdotal evidences of people posting here doing well by practicing AA balancing. Connie is the perfect example of "goosing" the AA in a downturn. She reclaimed her Oct 07 high a month or two ago. I wish I had the guts to do that. I think Moemg is also another gutsy lady.
Back to your post about the rebalancing criteria, you have done more than I have, which is zero, with your experiment. I would agree with the result of your exercise of trying to find the "optimal" bands for rebalancing, meaning the return being an erratic function of the band. It is another proof that the market is a random process. By the way, our geekspeak for the no-action band is "hysteresis" when we build a dynamic model of a system.
One can try to fit an "optimal" strategy to a specific stock period, but it doesn't mean much. An optimal hysteresis for rebalancing in 1999-2009 would be different than an optimal value for another period. There were long bull periods where one should not rebalance at all (in hindsight of course).
No. I personally consider buy-and-hold to be kind of the opposite to rebalancing. In buy-and-hold, you let your winners run. In rebalancing, you trim from your winners and add to your losers.
Note that to many people "buy-and-hold" simply refers to someone who is not constantly playing the market.
This is also the way I practice buy-and-hold. As I bought individual stocks, I would ride the winner until the fundamental changed. If a stock drops a bit, say 25%, I will investigate to see if I can discern a valid reason. Most of the time, it appears to be just "noise". Else, I will pull the trigger. Small and mid cap stocks are much noisier than the S&P 500, and I often let them drop as much as 50%.
So, my intention when buying a stock is to hold it forever, unless there is a reason to sell it. Just the fact that it has doubled in the last month or year and has outpaced the market does not mean it has to be sold. I do not buy a stock expecting it to double or triple in a year or even a few months, although have stumbled across a few that did. When that happens, it may be due to their cyclical business, or a major breakthrough or invention. I usually try to understand to satisfy my curiosity, then leave them alone. If I thought the stock got to bubble territories, then I would put a trailing stop trying to squeeze a bit more out of it.
My "buy-and-hold" takes a little bit of work, and requires some very subjective judgements, but an occasional 5-bagger would cancel out the little losses I suffered along the way. Most of my positions just fluttered along with the S&P500 anyway.
So, that's what I have been doing. On the other hand, most people here practice what I would call "buy-and-balance", which is a really a "stealth" method of market timing.
Buy-and-balance if applied to individual stocks means that you would sell way early out of Walmart, Home Depot, Cisco, and Intel, etc.., if you were lucky enough to stumble across them 20 years ago.
Vanguard may sanction rebalancing, but Jack Bogle recently poo-poo'ed it.
What Bogle stated was that annual rebalancing added little if any to your return and potentially cost you in expenses and he doesn't do it.
See how confusing it can be to a newcomer. As I stated in a previous thread, there are so many Bogleheads practicing different things, and they all claim to follow the guru.
All I can say is this, which I obseved after being in the market for a few years. There are more than one approach to make money, and even many more ways to lose money. In the short term, no method proves conclusively to be the best, and if it did and enough people followed it, it would stop working. And in the long run, we are all dead. Meanwhile, I am trying to have fun and also keep from going broke.
