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Rebalance every 90 days?
Old 01-14-2008, 09:31 PM   #1
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Rebalance every 90 days?

My ex-employer's plan, where I still have some money, has an automatic rebalancing option between the different types of equity funds. However, the automatic rebalance will be done every 90 days; no sooner and no later. I seem to recall that anything more frequent than once per year historically does not work out as well as doing it annually, but i can't find the old data. Suggestions?
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Old 01-14-2008, 09:36 PM   #2
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Actually the best rebalancing is to look at least once every 2 weeks, but to only rebalancing when things are 20% out of tolerance.

See the links found in this thread: Asset allocation tutorial? and Asset allocation tutorial?
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Old 01-15-2008, 12:31 PM   #3
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William Bernstein's take on the rebalancing bonus.

Quote:
No one rebalancing period dominates. Monthly rebalancing was best in three cases, quarterly in four, and annual in three.
But, you better read the article for all of his assumptions.

Or, another article When Doesn't It Pay to Rebalance? talks about transaction costs (which may not be an issue for you), correlation of assets, etc.

Quote:
The above simulations provide an approximate answer to the question "Under what circumstances does it pay or not pay to rebalance?" Rebalancing works best with volatile, uncorrelated assets whose returns are roughly similar.
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Old 01-15-2008, 12:38 PM   #4
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Quote:
Originally Posted by Gearhead Jim View Post
My ex-employer's plan, where I still have some money, has an automatic rebalancing option between the different types of equity funds. However, the automatic rebalance will be done every 90 days; no sooner and no later. I seem to recall that anything more frequent than once per year historically does not work out as well as doing it annually, but i can't find the old data. Suggestions?
Rebalancing is best done with new contributions, not buying and selling. This lets winners rise and compound on their own.

I rebalance 2X per year.


Each June I adjust contributions. Lower performing classes get more money, the asset classes which are doing good get less. I do not drop contributions to 0 (so IRA funds always get at least $50 and 401k funds always get at least 5%).

Each December I rebalance back to my asset allocation.

In addition, In June I sell 1% of each holding to a bond position. In December I sell another 1% of each holding to a bond position. The goal is 10% bonds in 5 years (2008 is second year of the shift). Bond position reduces large cap down to 40% when all is said and done.

43% domestic large cap
15% domestic mid cap
15% domestic small cap
15% international large cap
10% international small cap
2% bonds
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Old 01-15-2008, 12:46 PM   #5
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Further information that may help:

Since I'm retired, any rebalancing in this account will be from existing funds; nothing being added.

There are no transaction costs for rebalancing (well, no costs charged to ME).

This money is all in various equity funds, no cash or bonds.
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Old 01-15-2008, 03:22 PM   #6
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Quote:
Originally Posted by Gearhead Jim View Post
Further information that may help:

Since I'm retired, any rebalancing in this account will be from existing funds; nothing being added.

There are no transaction costs for rebalancing (well, no costs charged to ME).

This money is all in various equity funds, no cash or bonds.
How much cash do you hold?

If you hold 2-3 years expenses in cash, my suggestion is only rebalance during an up year (so you are selling winners and raising cash).
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Old 01-15-2008, 03:27 PM   #7
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My ex-employer's plan, where I still have some money,
Why do you still have money in this plan? Seems like moving it to Vanguard may save you some money by lowering expenses.
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Old 01-16-2008, 12:18 AM   #8
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We keep about 9 months of expenses in cash and equivilants.

We still have some money in this account because the expenses are about equal to vanguard, performance has been good, and i need to stay in the plan in case we get some additional payments later (complicated story).
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Old 01-16-2008, 03:30 AM   #9
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Originally Posted by jIMOh View Post
How much cash do you hold?

If you hold 2-3 years expenses in cash, my suggestion is only rebalance during an up year (so you are selling winners and raising cash).

an up year for what though? if you are well diversified every year something may be up and something down. i wouldnt rebalance only when stocks were up. last year tips and the long bond had a great year of 11%.. i would want to have sold some bonds and bought more stock which didnt do as well,.
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Old 01-16-2008, 12:26 PM   #10
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Originally Posted by mathjak107 View Post
last year tips and the long bond had a great year of 11%.. i would want to have sold some bonds and bought more stock which didnt do as well,.
and that is exactly what I have just done. bought more TSM with the TIPS and TBM gains to balance back to 50/50. Feels good
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Old 01-16-2008, 01:15 PM   #11
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I was just curious about how frequent to rebalance, after reading the title of this thread. My TSP charges no transaction costs, and the daily fund values for the past few years are easily accessible online.

So, using Excel and a hypothetical $100K investment at the beginning of 2007 and my present 4-fund allocation, I figured out what I would have in one year if I rebalanced
  • every Friday, or
  • only on the last Friday of the month, or
  • only once a year.
My results were:

$106,958 if I rebalanced every Friday.
$106,775 if I rebalanced only on the last Friday of the month.
$106,674 if I rebalanced only once a year.

This enjoyable little exercise helped me to see that frequent rebalancing doesn't help as much as I thought it would. I have to admit that I am surprised at how little the difference was. (Of course this was just one sample year and one allocation, so results will vary).

Now this is my kind of fun.
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Old 01-16-2008, 02:56 PM   #12
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Quote:
Originally Posted by Want2retire View Post
I was just curious about how frequent to rebalance, after reading the title of this thread. My TSP charges no transaction costs, and the daily fund values for the past few years are easily accessible online.

So, using Excel and a hypothetical $100K investment at the beginning of 2007 and my present 4-fund allocation, I figured out what I would have in one year if I rebalanced
  • every Friday, or
  • only on the last Friday of the month, or
  • only once a year.
My results were:

$106,958 if I rebalanced every Friday.
$106,775 if I rebalanced only on the last Friday of the month.
$106,674 if I rebalanced only once a year.

This enjoyable little exercise helped me to see that frequent rebalancing doesn't help as much as I thought it would. I have to admit that I am surprised at how little the difference was. (Of course this was just one sample year and one allocation, so results will vary).

Now this is my kind of fun.
The frequency depends on whether the market goes up/down the next week, or had gone down/up considerably that week. In a sideways market (2007) rebalancing can generate positive returns from the volatility.

If you rebalance close to a peak/valley time wise, you will probably see better performance- long term.

Last year was volatile, the outperformance for more frequent rebalancing was not surprising.

I have read that history shows to let winners ride as much as possible. I do not do this fully, (let them ride), but I do take precautions to take some profits twice per year.
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