Portfolio Required v Equity Asset Allocation

[street]

A great thread, thanks again.

I also have seen here, and from other sources, that rebalancing comparing apples to apples, that not rebalancing has shown to be just a little better result at the end point. I really think it is a toss up but finding that if I do less means more for me.

 

[pjigar]

I am 100% equity due to attractiveness of residual portfolio value. Actually more like 50% equity and 50% real estate!

 

[racy]

...Should one not rebalance at all, or wait until it is way off, like 20%?....

Funny you should say "20%" because that's what Kitces writes about in this article: https://www.kitces.com/blog/best-op...y-time-horizons-vs-tolerance-band-thresholds/

Quoting from it, "A 2007 study in the Journal of Financial Planning by Gobind Daryanani entitled “Opportunistic Rebalancing” studied rolling 5-year periods from 1992 to 2004 and found that the optimal rebalancing threshold was at a relative threshold of 20% of the investment’s original weighting."

But, who really knows...

 

[SecondCor521]

I'll point out something I discovered during my early FIREcalc exploration days about 13 years ago now: The conclusions drawn somewhat depend on the duration of the retirement period.

OP used 30 years as an example. Generally speaking, the longer the term (40 years, 50 years), the more residual values and AA will favor stocks, because stocks have historically outperformed bonds over long periods. The shorter the term (10 years, 20 years), the more it becomes an even picture and heavier bond allocations can be relatively safer, because there are a number of 10 year periods where stocks did poorly for a while but bonds did OK.

Personally I use 40 years in my analysis, because I'm 50 years old now. But older or younger retirees might want to do the same analysis as the OP with their own time frame as the conclusions change somewhat.

 

[RunningBum]

Funny you should say "20%" because that's what Kitces writes about in this article: https://www.kitces.com/blog/best-op...y-time-horizons-vs-tolerance-band-thresholds/

Quoting from it, "A 2007 study in the Journal of Financial Planning by Gobind Daryanani entitled “Opportunistic Rebalancing” studied rolling 5-year periods from 1992 to 2004 and found that the optimal rebalancing threshold was at a relative threshold of 20% of the investment’s original weighting."

But, who really knows...

Interesting article, as usual, from Kitces.

I don't like to put too much stock in back testing. One could tailor an approach to best fit past data. One might say, "only rebalance in months starting with J" and go on to come up with explanations why the beginning or middle of the year is best, only to find out in the future that the month to convert was random and didn't hold up for the Js. So keeping things in a 20% range might have worked in those years, but a 10% or 30% range might work better in the future.

Even the whole theory on how far to let the market run (up or down) before adjusting is questionable. The market could swing 9% in each direction, causing no rebalancing yet missing some nice opportunities to buy a little low, and sell a little high. Or a 15% run could come after a 6% drop, still not quite enough to trigger anything even after a nice run you might want to back off of. But of course you can just easily construct scenarios where you adjusted too early and missed a better run, or got hit harder by a downturn.

I think I agree with your last statement, "who knows?".

 

[Dd852]

This has been one of the most thoughtful and interesting threads we’ve had in a while. Many thanks for all the good contributions

 

[NW-Bound]

... staying out of equities altogether (0% on chart) requires a portfolio 43% larger than being 60% in equities - that's a lot of extra years working, or considerably less spending. And with the current outlook for fixed income, the premium to exclude equities is even greater. I remember one very persistent zero equity member, but I don't know if we have any zero equity allocation investors left here?

I know whom you talk about. He has not posted in quite a few years.

There are at least two currently active posters who are mostly in fixed-income assets. They don't seem to mind missing out on the bull run of the market.

The husband of my sister-in-law is like that. He bailed out of the market in the market crash of 2008, and has not looked back. To him, the extra return provided by the market is not worth the aggravation. I guess it is like me who took ER and bailed out at the top of my work life, when I drew the highest pay. How did I refuse money?

I always raise eyebrows/cock head when I read someone here talking about rebalancing in small increments like 1% or even 5%. It has seemed to me that adjustments that small would have little or no effect. Your charts confirm this for at least the middle AA range. Good post. Thanks.

Well, some people keep track of their expenses down to the penny. That's a lot smaller than 1% of their stash. No way they will let their AA be out of balance by that much.

By the way, 1c is 1/1000000 (1 millionth) of 1% of a $1M portfolio. Or looking at it another way, 1% of a $1M stash is 1 million pennies.