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Rebalancing Assistance Needed
Old 10-31-2007, 11:59 PM   #1
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Rebalancing Assistance Needed

There are basically two methodologies on rebalancing. Either a predetermined time such as annually or when the allocation of one or more assets gets a set percentage off of its target. My question is about the latter. For example letís say my target for an asset allocation was 10% and my rebalance point was when it was plus or minus 5% of the target. If the asset allocation grew to 12% would that be considered 2% out of balance thus not needing to be rebalanced or would that be considered 20% off of the target. The former seems more logical to me but I just want to be sure.

Here is my current allocation for each equity vs. target. Does it appear to need rebalancing? I am thinking maybe some Emerging Markets needs to be redeployed to Small Value.

Actual
Target



LARGE CAP VALUE
40.6%
40.0%
SMALL CAP VALUE
14.0%
16.0%
INTL STOCK
11.7%
12.0%
INT'L SMALL COMPANY
18.6%
20.0%
EMERGING MARKETS
14.1%
12.0%

I am not looking for opinions on my equity selections or target allocations. I just need a little guidance on the rebalancing methodology. Everything is in tax deferred accounts.




Thanks
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Old 11-01-2007, 12:05 AM   #2
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Leave it for a year. For example, 10% on int'l small companies is only 2% on the total. How can it make much difference?
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Old 11-01-2007, 06:40 AM   #3
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I don't think it really matters what you do. I have read that Larry Swedroe advocates rebalancing when a class is off by 5% of the total portfolio or 25% of its own allocation. But one does not wish to rebalance too often, especially if it causes taxes. Maybe once per year, but not on any set date either.

I have also seen that one should not rebalance back to starting positions with winners since momentum plays a role. Instead with winners, just rebalance halfway back to starting desired positions.

Also, if you take distributions in cash instead of automatically reinvesting, then you can use that cash to invest in assets that are below their desired allocation.

Your portfolio does not appear to need rebalancing to me. The EM allocation might need rebalancing out of when it reaches 15% or 17% of your total allocation, and then only back to 13.5% or 14.5% of your total allocation.

That's my 2 cents. BTW, I like your allocation for equities. That's another 2 cents.
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Old 11-01-2007, 07:24 AM   #4
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You didn't say if you are in the accumulation phase or if you are retired, but if you are in the accumulation phase, just keep throwing cash in the accounts that need to be bumped up.
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Old 11-01-2007, 09:53 AM   #5
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Quote:
Originally Posted by Hydroman View Post
There are basically two methodologies on rebalancing. Either a predetermined time such as annually or when the allocation of one or more assets gets a set percentage off of its target. My question is about the latter. For example let’s say my target for an asset allocation was 10% and my rebalance point was when it was plus or minus 5% of the target. If the asset allocation grew to 12% would that be considered 2% out of balance thus not needing to be rebalanced or would that be considered 20% off of the target. The former seems more logical to me but I just want to be sure.

Here is my current allocation for each equity vs. target. Does it appear to need rebalancing? I am thinking maybe some Emerging Markets needs to be redeployed to Small Value.


Thanks
I would comment that 5% is too far to sway for something you target 10% for, as the swing in percentage points is a high percentage of the target.

In my case I use 1% as what triggers the "rebalance", and I rebalance twice a year.

The first rebalance each June just adjusts contributions. So if my target was 10%, and it was really 12%, I might contribute 5% to bring the 12 back to 10 (based on higher contributions to other assets). At same time if this asset is flying, it flies without me touching it).

The second rebalance in December involves buying and selling back to targets, and readjusting contributions to be in line with the targets as well.
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Old 11-01-2007, 10:39 AM   #6
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I want to re-iterate that rebalancing based on the calendar is something I do not recommend. One should rebalance when opportunities present themselves.

As an example, at the beginning of this summer in May was not a bad time to sell some equities and buy fixed income or REITs. The market had gone up quite a bit going into May and June. If you recall the media hype at that time and looked at your portfolio, you could discern an overweight in your equities. Later in mid-August, you could discern an underweight in equities. Both of these times presented you with actionable rebalancing opportunities if you cared to look. If you waited until December, you missed some good stuff.
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Rebalancing point
Old 11-02-2007, 06:02 PM   #7
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Rebalancing point

In my view, just use the calendar to pick the time for rebalancing, e.g. every 3 or 6 months, rather than trying to apply a portfolio change model. Since you're only talking about tax deferred investments you don't have to bring tax considerations into the timing.
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