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Old 11-17-2013, 04:44 PM   #21
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samclem, I'm actually thinking about doing what you describe, but not for the tax benefits.

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.
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Old 11-17-2013, 05:36 PM   #22
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Quote:
Originally Posted by pb4uski View Post
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!

Quote:
Originally Posted by RobLJ View Post
SamCl:
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 betstrategically 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.
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Old 11-17-2013, 06:27 PM   #23
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I think this is where I first started with rebalancing, though he's showing smaller intervals than others I was looking at:

Rebalancing

"

CONCLUSIONS:
1. The expected return of a rebalanced portfolio is not accurately represented by simple arithmetic weighting of individual asset returns. This is particularly true of assets which have high standard deviations and are poorly correlated. This may be of some importance to those utilizing optimization technology which depends on linear expected return determinations. Standard MVO techniques underestimate the benefit of high variance/low correlation assets.
2. The capitalization weighting suggested by the CAPM does not appear to be maximally efficient.
3. A formula is presented which accurately predicts rebalancing benefit. The inputs to this equation are portfolio composition, individual asset standard deviation/variance, and asset pair correlation/covariance. Since these parameters vary with sampling interval, it may be possible to use this formula to predict the optimal rebalancing frequency. Further, the results of the analyses presented suggest that shorter rebalancing intervals may not always be optimal. 4. Optimizers should understand that sampling interval will significantly affect both input and output data, and that he or she is optimizing only for standard deviatons (or other risk measures, such as semivariance) over a given sampling interval. "
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Old 11-17-2013, 06:52 PM   #24
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There's a good discussion on the purpose and value of rebalancing on the Bogleheads board (link). To steal from one post by "SmallHi" there:

Quote:
Technically speaking, the rebalancing bonus (or loss) and the diversification return (or return due to diversification, RDD) are 2 different things.

The rebalancing bonus can be positive or negative, while the RDD cannot (on a pretax basis).

The rebalancing bonus (or loss) is simply the difference in return between two assets (or more) that are rebalanced periodically, vs the same combination that is not rebalanced at all.

For example, since 1926, a 50/50 unrebalanced portfolio of S&P 500 and T-Notes compounded at +9.5% a year. Had the same investor rebalanced annually back to the 50/50 weighting, his return would only be +8.4%. This is a rebalancing loss (not a bonus) of 1.1% a year.

Now, if we take a 50/50 unrebalanced portfolio of S&P 500 and EAFE since 1970, we find the non-rebalancing investor compounded at 11.1% a year. The investor who rebalanced annually back to 50/50 made 11.5% a year. This is a rebalancing bonus of 0.4% a year.
Sometimes anual rebalncing results in gains, sometimes it doesn't.
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