Rebalancing necessary??

[Hillbilly]

Found this on the FundAlarm site this AM. Interesting read....hope I don't screw up the link...

http://www.fpanet.org/journal/articles/2007_Issues/upload/54565_1.pdf

 

[REWahoo]

The quoted article deals with rebalancing a portfolio during the draw down in retirement. From the Executive Summary:

"...rebalancing provides no significant protection
on portfolio longevity, and this
holds for all withdrawal periods. In fact,
in some cases, rebalancing increases the
number of shortfalls."

"Withdrawing bonds first, over stocks,
performs the best of all the methods,
though the resulting stock-heavy portfolio
may make some investors uneasy.
This method also is most apt to leave a
larger remaining balance at the end of
30 years, while rebalancing leaves the
smallest amount."

And for you Target Retirement fund fans:

"The results suggest that the use of lifecycle
funds or a life-cycle strategy that
decreases stock proportions as one
grows older needs empirical justification."

 

[LOL!]

From the tables in the paper, the "some cases" in the statement

In fact, in some cases, rebalancing increases the number of shortfalls.

are not cases you would be practicing anyways (high withdrawal rates, low percentage allocated to equities.

In those cases with equities >= 40% of assets and withdrawal rate 5% or less, rebalancing ALWAYS had the lowest failure rate (see Table 1).

 

[W2R]

The table were sure interesting. I noticed that at (my present) 60% stocks, the failure rate after thirty years at 5% withdrawal rate was only 20% for a rebalanced portfolio, and also only 20% for a portfolio that wasn't rebalanced but had bonds withdrawn first.

Hmm. Well, gee. I'm always so skeptical.

 

[LOL!]

This paper will set at ease the minds of those who worry that when they die: Will their spouse be able to manage their portfolio?

The answer appears to be that as long as the spouse does nothing, then they will be in good shape. It sounds like good advice for those still living as well.

 

[eytonxav]

While I just skimmed the paper, it appears to simply address one's stock to bond mix and suggests not to worry about rebalancing that, but I don't think this means you do not need to rebalance your equity investments (lc/mc/sc/int) within the stock component of your portfolio.

 

[unclemick]

Interesting - since my retirement rides on life cycle funds - aka Target Retirement, I'd better read the article before before I call Vanguard in a panic to tell them they screwed up.

heh heh heh

 

[2B]

This paper will set at ease the minds of those who worry that when they die: Will their spouse be able to manage their portfolio?

The answer appears to be that as long as the spouse does nothing, then they will be in good shape. It sounds like good advice for those still living as well.

My spouse is still pretty hot so her biggest concern should be having some bum sweep her off her feet and steal the principal.

It will be at least a decade before the asset allocation is significantly skewed.

 

[saluki9]

Wow, this is amazing research! Let me make sure I get this correct.

so we know that in the past that equities have outperformed other asset classes. so if we leave the equities in place and draw other asset classes when we know the equities outperformed then the portfolio will last longer? Man, I hope they didn't get paid too much to figure this out!

Rebalancing is primarily about reducing the standard deviations of returns, not maximizing them. If maximizing returns were the only goal we would invest 100% of the portfolio in the asset class with the highest expected return.

 

[bssc]

I have always had a suspicion that rebalancing was in the best interest of the sales force. I didn't see anything about fees and redemption charges but suspect that if rebalancing was just OK compared to leaving the portfolio alone, getting socked with charges would weigh against it.

Of course, I rebalance by selling my highly appreciated stocks or stocks that have been bought out. Does that count?

 

[old woman]

I am 100% equities because I can't quite wrap my mind around selling the profitable stuff and buy more losers. I am heavily overweighted in international and emerging markets but I don't want to sell them and buy something that isn't growing much. I know I should and guess I probably will but it doesn't feel right.

 

[2B]

I am 100% equities because I can't quite wrap my mind around selling the profitable stuff and buy more losers. I am heavily overweighted in international and emerging markets but I don't want to sell them and buy something that isn't growing much. I know I should and guess I probably will but it doesn't feel right.

Someday, and that day may not be for a long time, you will understand why to rebalance.

There are studies that have looked at how often to rebalance. From what I remember the optimum was at 2 years but there wasn't much difference between 1 and 4. I think doing it too often (monthly) was a bigger negative than not doing it at all.

If I knew what I know now, I'd have put all my money into REITs in 2000. I'd be much better off financially. If you had put all your money in 2000 into the S&P, you'd just now be breaking even. That relationship may reverse between now and 2015.

 

[d]

sluki9 is right on target! i would have thought that the increasing equity allocation (as one ages) would get a more vehement response than it has.

 

[LOL!]

sluki9 is right on target! i would have thought that the increasing equity allocation (as one ages) would get a more vehement response than it has.

Nah! It's all about buckets, isn't it? If you are 60:40 with equities:bonds and withdraw 4% a year, then your bonds give you withdrawals for 10 years easy. Now you retire at 65 and live to only 75. So your 40% starting bucket was all you really needed in the first place.

 

[Hillbilly]

I was wondering how long this thread would go before we talked "buckets".

I bet unclemick got the Vanguard computers slowed down a bit while they read this interesting [-]garbage[/-] paper.

Hillbilly

 

[2B]

Nah! It's all about buckets, isn't it? If you are 60:40 with equities:bonds and withdraw 4% a year, then your bonds give you withdrawals for 10 years easy. Now you retire at 65 and live to only 75. So your 40% starting bucket was all you really needed in the first place.

The great mortality issue! Planning would be so much easier if we knew how long our health would last and how long we'd live.

I've found that most of this forum's residents believe they are immortal. They expect to be traveling and living the good life at least until they are 100. It's all well and good to plan for a long life but reality says most of us will be dead or sitting quietly in our nursing home by the time we're 85.

If you follow "buckets," you will deplete your bucket #1 before moving onto bucket #2 but I think most asset allocators would replenish it annually. Some might pass on a year if the equity portion was particuarly beat down but I suspect the typical response would be to spend less to preserve the principal.

Your comment about only needing the 40% of your portfolio makes a lot of sense. If someone truly did retire at 65, following a true bucketized portfolio would put you at 79 before you go into bucket #3. Most of us will no longer care at that point.

 

[REWahoo]

I've found that most of this forum's residents believe they are immortal.

I think this probably suits us to a "t"...but only if you omit it.

 

[kcowan]

I wonder how the average rebalancer feels watching their winners from last year continue on for another year with less participation?

 

[REWahoo]

I wonder how the average rebalancer feels watching their winners from last year continue on for another year with less participation?

I'm sure a lot of factors are involved in how any individual reacts, not the least of which is whether you are in the accumulation or withdrawal stage. When I was accumulating and the above happened, I wasn't so happy. Now that I'm living off my portfolio and much more risk averse, it doesn't bother me at all.

 

[kcowan]

REW
What makes you more risk averse now you are no longer accumulating? I veiw my portfolio as my source of income now.

 

[Alan]

I wonder how the average rebalancer feels watching their winners from last year continue on for another year with less participation?

I try not to look but it was tough watching the losers I bought keep on losing. I had 3 straight years (2000 - 2002) when I was selling winners (bond funds) to buy losers (stock funds).

But it all came good in the end, and I never went back and thought about how I could have done better if I had held the winners much longer.

 

[REWahoo]

I veiw my portfolio as my source of income now.

Me too. For that reason I'm more emotionally sensitive to the fluctuations of the market and more diligent in maintaining my asset allocation where I want it to be. I have absolutely no regrets about selling some equities when they exceeded my AA by ~5% a month or so ago. If my source of income was still the workplace, I would have probably let it ride a little longer before rebalancing.

 

[clifp]

Wow, this is amazing research! Let me make sure I get this correct.

so we know that in the past that equities have outperformed other asset classes. so if we leave the equities in place and draw other asset classes when we know the equities outperformed then the portfolio will last longer? Man, I hope they didn't get paid too much to figure this out!

Rebalancing is primarily about reducing the standard deviations of returns, not maximizing them. If maximizing returns were the only goal we would invest 100% of the portfolio in the asset class with the highest expected return.

I skimmed the paper, and was about to post exactly this point. If the authors had left it at that blatantly obvious point, I'd be tempted it just to add smarky comment that based on the last 5 years you should withdrawal your international equities last. But when they go on to conclude

The current trend in retirement planning
uses life-cycle funds, which change
portfolio asset allocation as a function of
the age of the retiree—the older the
retiree, the smaller the proportion of the
portfolio in stocks. If minimizing shortfall
risk is the retiree’s ultimate goal, these
results suggest that the life-cycle strategy—
at least during the withdrawal phase—
needs additional empirical justification.​

I wonder how these guys earned PHds. The volitality of bond returns has been lower than equity returns forever (or at least as long as anybody has data for.) Now it is possible in the future that bonds returns may have higher standard deviation than equity returns, but I think is extraordinarily unlikely. In contrast, although stocks have had higher returns than bonds over any 30 year we've seen, there are a lot of smart people saying that is likely that this difference may narrow.
I wonder what part of "past performance is not a guarantee of future returns" the good professors don't understand.​

The objective of retirees is to have enough A. income to live comfortably, B. protect themselves from inflation. C. Die before your money runs out and D. Sleep well at night. Now 85 year old with an 85% equity position maybe in a good position for A and B, but I am not sure C is true and I know D is false.

 

[megacorp-firee]

The objective of retirees is to have enough A. income to live comfortably, B. protect themselves from inflation. C. Die before your money runs out and D. Sleep well at night. Now 85 year old with an 85% equity position maybe in a good position for A and B, but I am not sure C is true and I know D is false.

I might restate C. as Make sure you money doesn't run out before you die.
Hair splitting, but a more correct statement. Otherwise you could acommplish C by stepping in front of a bus when you are down to your last dollar. After all, remember, we on this forum believe we will live forever.

 

[audreyh1]

I wonder how the average rebalancer feels watching their winners from last year continue on for another year with less participation?

Lucky! Seriously, we still own the winners even if they've been trimmed a bit. I know lots of folks who bail from an "overvalued" asset class prematurely, and they are the ones frustrated to see them continue higher. With rebalancing you've still got a piece of everything, so you're still participating.

Audrey