Originally Posted by pb4uski
I'm doing it more based on a view that if rebalancing forces one to buy low and sell high, that to rebalance annually across S&P sectors would result in higher returns over time that simply holding the S&P 500 index.
Also see Something I'm thinking about
I need to think about the tax benefits some - it might make it juicer as I was more worried about rebalancing taxable gains so I was initially planning to focus on equities in my tax-deferred accounts.
Thanks for the link to that previous, related thread. Your OP there mentioned the recent better performance from an equal weighting rather than a cap-based weighting of the sectors, and I'd just comment as I did earlier here: It seems plausible that was just a reflection of the fact that an equal-weighting amounts to under-weighting the Financials, and they got clobbered in 2007 and 2008. If that's right, the overperformance of the "equal weighting" approach is just a random artifact of the way these sector funds are put together and there's no reason to expect that performance to continue.
I know it is common knowledge here, but just to restate it: rebalancing among asset classes
does not result in improved returns. Returns would be enhanced if we never rebalanced. The primary reason to rebalance is to reduce volatility. Rebalancing usually results in the selling of higher-return assets (e.g. emerging market stocks) to buy lower-return assets (e.g. domestic bonds), and this hurts returns. Now, I don't know if that same observation holds true between domestic equity sectors, it would depend on whether they have fundamentally different expected returns (and risk).
Anyway, it appears that if you pursue the sector-based approach you are exploring that there could be some tax benefits, which is a good thing!
Originally Posted by RobLJ
I've pondered this for almost 15 years and do a version, in which I have too many core funds and have branched out in narrow areas (Biotech, Latin America, Materials, Floating Funds, Emerging Market and foreign bonds in bond allocation) to target areas that I think are under-valued or longer term values (based on a theme).
I'm digesting Lowell Herr's writings, thanks for that. Your less rigorous approach would scratch the itch many of us have to
make a bet
strategically invest in niche areas that look promising. One thoguht that occurs to me: Keeping the bets narrow (rather than, say, putting all the dough in Mr Smartguy's Surefire Rising Star Fund) would have the advantage of being more likely to generate losses that could be selected and harvested for tax purposes, rather than having them mixed in with the "winners" and thus not exploitable.
I think I'm in danger of letting the "tax tail" wag the "return" dog.