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Old 08-27-2008, 03:17 AM   #21
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In theory yes, reblancing should result in higher returns for the average investor. However, your personal choices and timing may not provide optimum returns.

I have seen some studies on the topic. I think there was an article in the Financial Planning Journal that touched on the topic...

I think it showed the optimum interval between rebalancing to be more than 1 year... something like 2 or 3 years. I can't remember exactly.

I think the art of reblancing depends a bit on whether or not you are using individual stocks or mutual funds. Speaking in general... You might need to capture gains on individual stocks based on how the company has performed (so the time to rebalance may be different for each company). For Mutual funds, the interval depends a bit more on the Bull/Bear moves. Ideally you would rebalance during the peak and again at the bottom of the valley. But timing that is a problem... so the advice is to pick a somewhat fixed interval.

We were 100% equity up till about 1.5 years ago. Of course both of us were still working. My timing was because we were approaching 5 years till FIRE. I moved 30% to bonds. We were a little lucky in the timing... about 6 months before the stock market began to soften (and before the peak). At the time, I did not know if the Stock market would keep going or not. It did not matter, the goal was to diversify.

While we were in equity, I did not rebalance so much as restructure (prune the portfolio and add new securities). I tried to keep things balanced somewhat by adding new money to the asset that was low.

I have not rebalanced since I moved the money to bonds. In the future, I intend to do more restructuring. As we move from the accumulation phase to the distribution (when we FIRE), I may not need to rebalance. My general plan is to have a self managing portfolio (for rebalncing purposes anyway). I am planning to use a series of Target funds (quasi-bucket approach). The other option I am studying is the use of a Managed Payout fund (perhaps for all of the portfolio)... not sure yet... since the Payout Funds don't have much of a track record yet.
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Old 08-27-2008, 04:38 AM   #22
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rebalancing gives you another layer of disipline to help you stay on track and keep your strategy going in stressful times... whether at the end of the day it adds much extra is another story.. in stressful volatile times a lot of people emotionally need to act and do something to stem the losses or for some to take advantage of the drops . human reaction as proved by jason zweig in his book your money your brain is to bail and run for alot of people who thought they had a high tolerance for risk when the market was going up and for others it represents an irristable sale to buy. .

by rebalancing it takes some money off the table in that which you may have gained in and put it in that which is down. by buying something down and looking forward to it going up we tend to feel better......it gives you a structure to which you can buy and sell within the framework of keeping your master plan going
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Old 08-27-2008, 09:15 AM   #23
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rebalancing gives you another layer of disipline to help you stay on track and keep your strategy going in stressful times... whether at the end of the day it adds much extra is another story.. in stressful volatile times a lot of people emotionally need to act and do something to stem the losses or for some to take advantage of the drops . human reaction as proved by jason zweig in his book your money your brain is to bail and run for alot of people who thought they had a high tolerance for risk when the market was going up and for others it represents an irristable sale to buy. .

by rebalancing it takes some money off the table in that which you may have gained in and put it in that which is down. by buying something down and looking forward to it going up we tend to feel better......it gives you a structure to which you can buy and sell within the framework of keeping your master plan going
So rebalancing is sort of a placebo effect?
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Old 08-27-2008, 09:21 AM   #24
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Originally Posted by chinaco View Post
In theory yes, reblancing should result in higher returns for the average investor. However, your personal choices and timing may not provide optimum returns.

I have seen some studies on the topic. I think there was an article in the Financial Planning Journal that touched on the topic...

I think it showed the optimum interval between rebalancing to be more than 1 year... something like 2 or 3 years. I can't remember exactly.

I think the art of reblancing depends a bit on whether or not you are using individual stocks or mutual funds. Speaking in general... You might need to capture gains on individual stocks based on how the company has performed (so the time to rebalance may be different for each company). For Mutual funds, the interval depends a bit more on the Bull/Bear moves. Ideally you would rebalance during the peak and again at the bottom of the valley. But timing that is a problem... so the advice is to pick a somewhat fixed interval.
I wonder then is it better to rebalance per a a time period ( be it 6 months, 1 year or three years) or by percentage off target (say when the 60/40 goes to 50/50?
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Old 08-27-2008, 05:31 PM   #25
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So rebalancing is sort of a placebo effect?
i think depending on your timing of the rebalance yes... if you rebalanced into a lessor performing asset and that asset took off then rebalancing helped. but if you sold some of your winner and the winner stayed a bigger winner for the next few years than no it dint help.
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Old 08-28-2008, 02:29 AM   #26
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I wonder then is it better to rebalance per a a time period ( be it 6 months, 1 year or three years) or by percentage off target (say when the 60/40 goes to 50/50?
Time interval and % deviation are the two most common approaches. However, there can be other considerations that play into the overall management approach to optimize growth (for example tax efficiency).

IMHO - I prefer a simple approach that keeps me from getting hurt by market turbulence. Once you have diversified across some asset classes, within the asset class, and across countries...you are fairly well protected from a number of common risks. Once you have diversified, you are then trying to stick with your target portfolio to protect against market ups and downs ( a nice by product is locking in some of the gain related to an increase). I would like to optimize the whole thing to peak efficiency so that I get maximum returns... but once you are diversified, rebalancing is about staying that way (close to the target portfolio).
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Old 08-28-2008, 04:26 AM   #27
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the problem too is what a lot of people call diversification really isnt. they still try to predict the future and shy away from even owning asset classes they think wont go up anymore because they already had a great run, like commodities or long term bonds , or asset classes they choose not to own because their crystal ball says its not time.
rebalancing for alot of fortune tellers is merely moving from growth stocks to value stocks or international stocks.....

they dont really own the right asset classes to have diversification even alter their volatility
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