Rebalancing Strategy

[easysurfer]

Not as passionate (perhaps ) a discussion as the Market Timing Strategy thread, but for those who don't time the market , what's your strategy for rebalancing.

I used to only rebalance annually, at the start of the year. Then with the turmil of 2008 I decided, well maybe better to do so more often.

But the again, I think I may keep it simple and just go back to annually.

The simplest way to rebalance your portfolio

Also, it helps remind myself that I really like to drive with a cruise control instead of zig-zagging back and forth (that's a whole other study, that the zig-zagger doesn't get to the destination any faster).

 

[ERD50]

I would LOVE to see some hard data on this. Some real, hard-core, deep-dive data back-testing of different rebalancing methods.

What % to trigger?

Use a calendar, or re-bal on any shift above X%?

My gut says throw the calendar out the window. AA is a % calculation, and that calculation has nothing to do with what day of the year it is. If one thinks that annual re-bal helps to detect long-range swings, I think that's starting to sound a little like dirty market timing

But the data will tell us, at least historically. We can collect various strategies here, but without data, what will we learn (other than a little food for thought, satisfy curiosity, etc)?

A further tweak to the back-test might be to limit it to the 'fail' scenarios in FIRECALC. I'm more concerned about side-stepping failures than I am in boosting returns in the years I was already OK. If the same re-bal technique does both though, all the better!

-ERD50

 

[unclemick]

1966 - 2006 manually rebalancing my incredibly brilliant investment picks - not.

Jan 2006 - full auto life cycle Vanguard Target Retirement fund.

heh heh heh - and a few stocks in taxable which are bought/sold not rebalanced - to keep the hormones in check.

 

[Keim]

I have 10% rebalancing bands. I check them monthly or at times of major market movements.

 

[Chuckanut]

I recall reading an article on rebalancing that claimed balancing more frequently than once a year actually reduced returns.

For what it is worth, here is the article

How Often Should I Rebalance My Investment Portfolio? A Brief Article Review » My Money Blog

 

[Achiever51]

I've been thinking about rebalancing to move some profits into my MM and to get back to my comfort zone .

The recent market whipsaw took care of the profits...and magically brought my AA back into line. boo. hiss.

 

[HFWR]

LMGTFY...

Rebalancing investments - Wikipedia, the free encyclopedia

The promise of higher returns from rebalancing to a static asset allocation was introduced by William Bernstein in 1996. It has since been shown to only exist under certain situations that investors are not able to predict. At other times rebalancing can reduce returns.

Efficient Frontier

You makes your choice and you takes your chances, but don't sweat this one too much. The returns differences among various rebalancing strategies are quite small in the long run.

Rebalance Your Portfolio To Stay On Track

Rebalancing your portfolio will help you maintain your original asset-allocation strategy and allow you to implement any changes you make to your investing style. Essentially, rebalancing will help you stick to your investing plan regardless of what the market does.

 

[pb4uski]

I tend to rebalance early in the year when I happen to think about it, but no set date. Further, if my AA gets more than 5% out of whack from my 60/40 equities/fixed target, then I will also rebalance.

The 5% trigger doesn't happen very often but did happen on Monday.

I will admit in 08/09 when things were dire I should have bought equities and I chickened out and didn't rebalance but I would be better off today if I had so I'm now a convert.

 

[RockyMtn]

Yearly or off 5% in any single asset category. Keep in mind any tax consequences from the rebalance. Often that can make the rebalance not worth the time, cost and effort.

 

[ERD50]

LMGTFY...

Rebalancing investments - Wikipedia, the free encyclopedia
Efficient Frontier
Rebalance Your Portfolio To Stay On Track

Thanks for those links, HFWR. I will look into them more later.

I actually did a very rough spreadsheet model of this a while back. And these two excerpts reflect what I that model seemed to say also:

It has since been shown to only exist under certain situations that investors are not able to predict. At other times rebalancing can reduce returns.

You makes your choice and you takes your chances, but don't sweat this one too much. The returns differences among various rebalancing strategies are quite small in the long run.


From what I saw in my model (and is obvious if you think about it, it just isn't obvious how large the effect is) - re-balancing also has you taking money off the table when stocks are on an extended up-swing. So you don't share in that rise as much as you would have if you let it ride. So that offsets the benefits when the opposite occurs. It really makes me wonder just how important it is, though I still think it makes sense so that your AA does not go out of whack so far as to make one nervous about their allocation.

-ERD50

 

[audreyh1]

I recall reading an article on rebalancing that claimed balancing more frequently than once a year actually reduced returns.

For what it is worth, here is the article

How Often Should I Rebalance My Investment Portfolio? A Brief Article Review » My Money Blog

I think this simply means that you should pick a band wide enough that you won't usually rebalance more often than once a year even under volatile market conditions.

IMO it makes more sense to rebalance when your AA is at least some amount out of whack rather than just on a calendar basis. Especially in a taxable account.

Of course distributions, taxes, and withdrawals usually create an out-of-balance situation, and this is what often has people rebalancing in Jan anyway. So practical considerations can make this a wash.

Audrey

 

[W2R]

Not as passionate (perhaps ) a discussion as the Market Timing Strategy thread, but for those who don't time the market , what's your strategy for rebalancing.

I always rebalance during the first week in January of every year.

Also, if my equity allocation is off by over 2.5% (that is, less than 42.5% or over 47.5%), I give myself the option of rebalancing at that time. I should have an automatic "trigger", but after reading some persuasive articles (or posts?) about how rebalancing frequently is not that helpful, I let it relax a bit.

I rebalanced several times during 2008-2009. I don't think I rebalanced during 2010, though, except in January as always. I am not ready to rebalance right now because of the high volatility in the market. Obviously mutual fund transactions take time, so that would make little to no sense on a practical level during a week like this one, when rebalancing would have been justified on Monday but not on Tuesday, etc.

Maybe later, maybe not. I did do quite well by buying low in late 2008. There was a lot of volatility, but the market had dropped so much that any day was a good day for that.

 

[audreyh1]

Rebalancing is always about returning to your initial AA which supposedly means you get back to your volatility comfort level.

Rebalancing has been shown to be a small drag on performance during bull markets (no surprise there) and come out slightly ahead during volatile or bear markets. But remember, AA is NOT about maximizing performance, it's about keeping volatility within certain bounds.

Audrey

P.S. And, um, you're not supposed to let the market rebalance your AA for you LOL!

 

[REWahoo]

P.S. And, um, you're not supposed to let the market rebalance your AA for you LOL!

You are absolutely right, but please tell me how you mange to prevent that in a whipsaw market like we have this week?

 

[audreyh1]

FWIW I set my band at 8 to 10% of an allocation, so if my equity is off 4 to 5% then it's time to rebalance. I used to have it at 5% of an allocation which meant if my equity was off by 2.5% it was time to rebalance, but after that was triggered THREE TIMES during 2008, I decided it was way too sensitive. I prefer to rebalance less often even if it means I miss shorter market corrections.

And my band has a band? Well, 8% means OK to rebalance but can take my time, 10% means I MUST rebalance, no being greedy or a scaredy cat!

Audrey

 

[audreyh1]

You are absolutely right, but please tell me how you mange to prevent that in a whipsaw market like we have this week?

If your AA was in balance before this happened, or even in balance at the beginning of this year, then this whipsaw should have knocked your AA well OUT of balance.

If your AA was well out of balance before this whipsaw occurred and you didn't take action at that time to rebalance for some reason, well.......

Audrey

 

[W2R]

If your AA was in balance before this happened, or even in balance at the beginning of this year, then this whipsaw should have knocked your AA well OUT of balance.

Not that much, really, just barely if that on Monday and not enough on Tuesday. Guess my "bands" are a little bigger than yours. Sorry to hear yours is so far out of balance. Will you rebalance now?

 

[REWahoo]

If your AA was in balance before this happened, or even in balance at the beginning of this year, then this whipsaw should have knocked your AA well OUT of balance.

If your AA was well out of balance before this whipsaw occurred and you didn't take action at that time to rebalance for some reason, well.......

Audrey

What if it was in balance early last week, rebalanced mid-day yesterday, out of balance at the close of the market yesterday but back in balance now? I suppose I'm listening to the wrong band, eh?

Note to readers: this and my previous post above is a lame attempt at humor as we experience 'interesting' market activity...

 

[audreyh1]

Not that much, really, just barely if that on Monday and not enough on Tuesday. Guess my "bands" are a little bigger than yours. Sorry to hear yours is so far out of balance. Will you rebalance now?

I was answering ReWahoo's hypothetical question with a hypothetical answer.

As of Monday, my AA was not quite out of balance enough to justify rebalancing. I still have to wait. My bands as twice as wide as yours, by the way, but I probably have a higher equity % allocation.

Audrey

 

[Lisa99]

I reblance once outside of 5% bands. Although I haven't balanced this week even though I'm outside of the bands...there is too much volatility.

And I check it daily right after I've downloaded banking transactions from the previous day....but I still w*rk, so this activity is done during a boring conference call which I have at least one every day

 

[audreyh1]

What if it was in balance early last week, rebalanced mid-day yesterday, out of balance at the close of the market yesterday but back in balance now? I suppose I'm listening to the wrong band, eh?

Note to readers: this and my previous post above is a lame attempt at humor as we experience 'interesting' market activity...

Yes LOL! Maybe your trigger is too sensitive? Listening to the wrong band - definitely! LOL!

Audrey

 

[W2R]

FWIW I set my band at 8 to 10% of an allocation, so if my equity is off 4 to 5% then it's time to rebalance.

My bands as twice as wide as yours, by the way, but I probably have a higher equity % allocation.

Perhaps I misunderstood your post above. My AA is 45:55 equities:fixed. My band would be 42.5% - 47.5% equities, plus or minus 2.5% of my portfolio (which would be plus or minus 5.6% of my equity allocation of 45%).

 

[HFWR]

My bands used to be 10%, i.e. if SPY allocation was 20%, rebalance at 18 or 22%.

That turned out to be too narrow in 2008-2009. I'm now at 25%, so 15% or 25%...

 

[easysurfer]

Maybe it's the laziness in me , but as of today, I'm gonna just rebalance at the start of the year. Otherwise it seems too much work for only a possible benefit.

I compare that to mowing the lawn. One can mow it every day or every other day to make the lawn nice and trim at all times. Or one can wait a week when the grass gets uneven and shaggy

 

[Chuckanut]

P.S. And, um, you're not supposed to let the market rebalance your AA for you LOL!

Darn! That's where I am getting it wrong!!