Rebalancing Approaches

[WilliamG]

I would be interested in timing and triggers used by many on this board to rebalance their portfolio allocations. This has been mentioned some, but I didn't find a conversation specifically devoted to various strategies. I recently found the following paper which I thought was interesting:

http://www.firstquadrant.com/PDFs/Monographs/9203mono.pdf

It's relatively old, early 90's, but may provide some relevant data. I believe it deals with institutional type portfolios and the re-balancing relates to basic stock and non-stock % without getting into any kind of sub allocations.

The paper discusses 2 major classes of approach, calendar based and target/range based (e.g., Larry Swedroe's approach). Gives some performance numbers on calendar (monthly, quarterly, annually) in which more frequent does best, and target/range in which bringing back out of range allocations all the way to target rather than just to within range does best.

Which do you use or do you use a combination? Do you handle sub-allocations any differently than the basic stock/non-stock split? Thanks! Bill

 

[charlie]

Re: Re balancing Approaches

Hi WilliamG,

About 1/3 of my total portfolio is invested in Target
Retirement 2025 in my wife's IRA and our after
tax funds. We do not plan to touch those funds
for at least 7 years when my wife turns 70. The
other 2/3 is in my IRA with the stock allocation in
6 different stock index funds at 10% each. and
short term corporate at 40%. I recently converted
my IRA from Target Retirement 2025 in order to
manage withdrawals more efficiently (I am 70).
I need to withdraw about 6% annually from the IRA
for living expenses.

Vanguard limits exchanges out of many of their
index funds to 2 in a 12 month period. I plan to
re-balance annually sometime in late December of
each year. However, I am still thinking about
exactly how to do it.

The most straightforward approach would be to
re-balance back to a 60/40 allocation and bring
each stock fund back to 10%. Somehow this smacks
of "reverse dollar cost averaging" which would cause
a buy high sell low result.

Intuitively it makes some sense for my situation
to hold the stock allocation to a fixed dollar
amount which would be increased by the annual
inflation rate each year. The 6 stock index funds
would be re-balanced equally within this fixed dollar
amount.

Over time, this would cause the 60/40 split to drift either higher or lower. It is hard to guess which right now. At present, my 40% allocation to Short Term Corporate represents about 6.5 years of withdrawal.
If past is prologue, the 60% current allocation to
stocks should, on average, replenish the bond fund
at approximately the rate it is being drawn down.

Whichever way it goes, I can always fine tune later.

For somebody in the accumulation phase, this strategy
would not be appropriate. In that case, I would
use the KISS method and bring everything up to snuff
once or twice each year.

Somebody please let me know if my thinking is all wet!

Cheers,

Charlie (aka Chuck-Lyn)

 

[JWR1945]

Somebody please let me know if my thinking is all wet!

Cheers,

Charlie (aka Chuck-Lyn)

I cannot speak in general. But on this particular point, you are exactly right:

The most straightforward approach would be to
re-balance back to a 60/40 allocation and bring
each stock fund back to 10%. Somehow this smacks
of "reverse dollar cost averaging" which would cause
a buy high sell low result.

Prices fluctuate a lot. My guess is that you can get a really good price about once every two or three years. It is probably a good idea to have enough flexibility so that you can make up to three years worth of withdrawals at the same time.

I have not looked into the details. I do know that reverse dollar cost averaging is expensive.

Have fun.

John R.