Rebalancing the Portofolio - What is the Best Time

[chinaco]

I know many of you rebalance your portfolios. Some use triggers. But my question is about simple time based rebalancing. If you rebalance what is the time of year you rebalance. I will assume a one-time a year rebalancing effort.


The Question:

Which quarter is the best time to rebalance your portfolio?

 

[LOL!]

Although you write that your question is about time triggers, I must respond that I think rebalancing based on a date is not as productive as rebalancing based on looking at the numbers in your portfolio.

I rebalance as warranted throughout the year. The "sell in May and go away" is one time to rebalance. For tech stocks, before earnings announcements in March is another time. In Nov-Dec is another time to do tax-loss harvesting and consider rebalancing. August is a good time before other folks come back from vacation and start putzing with their portfolios.

Anytime the market drops 1.5% or more in a day is a good time to rebalance by buying more stocks. Anytime the market goes up 2% or more in a day is a good time to rebalance by selling more stocks.

Etc.

 

[HFWR]

The transaction costs are too high, IMHO, to rebalance often, at least in my sized portfolio. Even a 10% deviation from my [-]dartboard-[/-] scientifically-designed allocation is often less than an even 100 share lot. I'm inclined to wait 2-3 years, or when my spidey-sense tingles...

 

[tightasadrum]

Shoot, with the mutual funds I have, I'm still trying to figure out what my current allocation is!

 

[W2R]

I always look at mine during the Christmas season, because the rat race seems to slow down a little and I am preparing for the next year. During the rest of the year, I watch to see how many percent I have drifted off my AA and sometimes rebalance on that basis as well.

 

[retire@40]

You need another option for "no specific time."

I'm still in the accumulation phase, so I mostly rebalance by buying into the category I need to increase without having to sell the assets I am over allocated into.

I do this at no specific time of the year, but I do tend to avoid the market when it's at all time highs, and I tend to buy when there is overselling (like a few weeks ago).

 

[WilliamG]

Another option, "no specific time" is a good idea. I am endeavoring to use range triggers by sub-allocation which I check quarterly. This will hopefully keep overall portfolio from getting out of balance while minimizing (in most cases) frequency of re-balancing. I need some discipline to avoid too much fiddling and ill advised market timing!

 

[slepyhed]

I follow the "asset allocation with annual rebalance" strategy because I believe that trying to time the market is futile at best.

My choice of what time of year to check my asset allocation and rebalance (if necessary) is completely arbitrary. I picked January because its usually to cold to do anything else then.

 

[bosco]

The transaction costs are too high, IMHO, to rebalance often, at least in my sized portfolio. Even a 10% deviation from my [-]dartboard-[/-] scientifically-designed allocation is often less than an even 100 share lot. I'm inclined to wait 2-3 years, or when my spidey-sense tingles...

I worry about the actual transaction cost as a percentage of the amount of the transaction, not share lots.

I have read that in the present day and age, there is essentially no penalty for not trading round share lots. In other words, if 325 shares makes my percentages right, I go ahead and pull the trigger on 325 rather than 300 or 400. Or even 75 shares, for that matter. Anybody have any information on this?

 

[HFWR]

I worry about the actual transaction cost as a percentage of the amount of the transaction, not share lots.

Yes, better 'splanation...

Frinstance, my allocation to VWO is 5%, or around $19.5k. Ten percent is $1950, which at today's price is about 19.5 shares. About $0.66/share in transcaction cost...

Plus, Bernstein (I think) opined that rebalancing every 2-3 years was adequate.

 

[ziggy29]

There are time-based "triggers" and there are performance-based "triggers."

I myself use a time-based trigger. I rebalance every 12 months. Bill Bernstein's research in The Intelligent Asset Allocator pointed to 18 months as the ideal time based on backtesting, if I recall correctly. More frequently than that, and you lose the tendency of "hot" asset classes to remain hot in the short term; longer than that and you gain the tendency of asset classes to "mean revert" to the average over time.

These days trading costs are negligible. On a $100,000 portfolio with 10 asset classes and $10 trades, performing 10 trades a year (assuming you used stocks or ETFs and not mutual funds), you are incurring just 0.1% in expenses annually. And many times your allocation will remain close enough in some asset classes that you don't need to rebalance all 10.

As a rule of thumb, if rebalancing will cost you more than about 0.5%, it's probably not worth it unless your allocation is WAY out of whack since rebalancing the right way probably adds little more than 0.5% to total return over strict buy and hold.

 

[bosco]

There are time-based "triggers" and there are performance-based "triggers."

I myself use a time-based trigger. I rebalance every 12 months. Bill Bernstein's research in The Intelligent Asset Allocator pointed to 18 months as the ideal time based on backtesting, if I recall correctly. More frequently than that, and you lose the tendency of "hot" asset classes to remain hot in the short term; longer than that and you gain the tendency of asset classes to "mean revert" to the average over time.

These days trading costs are negligible. On a $100,000 portfolio with 10 asset classes and $10 trades, performing 10 trades a year (assuming you used stocks or ETFs and not mutual funds), you are incurring just 0.1% in expenses annually. And many times your allocation will remain close enough in some asset classes that you don't need to rebalance all 10.

As a rule of thumb, if rebalancing will cost you more than about 0.5%, it's probably not worth it unless your allocation is WAY out of whack since rebalancing the right way probably adds little more than 0.5% to total return over strict buy and hold.

I suppose one or the other of us could refer to the book rather than trust our memories (mine, at least, is faulty). But my memory says 2 years was the optimum rebalancing interval.

Rebalancing every year probably loses a bit of return, but adds a bit of lessened volatility. Rebalancing less frequently than the optimum adds more volatility and approaches buy and hold.

I agree that if you can't do it for less than 0.5%, it probably isn't worth doing.

 

[In-control]

I use the Vanguard allocation tool. I put all of my taxable assets into the tool, categorize them and when an asset class 10% heavy I look for a good time to re-balance. What is nice about using the tool is that the allocation is always in your portfolio view and you can set a target allocation which compares historical performance - helping you tailor your allocation. Very useful and easy. It has replaced my allocation spreadsheet and allowed me to take targeted actions to get back in line with my target portfolio allocations. This also gives me more time to control our budget - the other side of the FI equation.

Logistically I like to sell, harvest, the over allocated asset class and forward the $ to my VG Prime MM. When the area that I want to buy into has a poor day I buy, from the VG Prime MM account. This way I am selling high and buying low. I also forward all distributions to that account. All of my stock/bond assets are in mutual funds so transaction fee's are not much of a concern.

My portfolio is 40Stocks/40Bonds/20Short term assets. Today it's 48% stock's - meaning that I will start to consider re-balancing.

This does not tie me to a time line but rather the performance of the portfolio. This works for me - I like to keep things real simple.

 

[Lsbcal]

For anyone interested (I imagine I'm talking to myself here ) I focus most closely on rebalancing between equities & bonds. This is not very time dependent but when equities look a little too "excited" based on the trailing 1yr returns (must be much greater then the avg of about 10%) then I'll rebalance. Looking at the Morningstar Total Returns page is good to follow this approach. I'll rebalance this particularily aggressively if I'm feeling real good about my equity returns like in early July this year.

Next to be rebalanced is the U.S vs International equities. Lastly I will worry and rebalance in the value/growth and small/mid/large categories. These later categories get a little tactical allocation depending on my bias at the moment.

Les

 

[HFWR]

Truman Clark, of DFA, examined the issue of rebalancing in detail in three papers published online in Fall of 2001. He concluded that, "the proposition that a rebalancing strategy can increase expected return is dubious," and that "rebalancing costs definitely reduce expected returns."

Evanson Asset Management - Asset Allocation Rebalancing and Long-Term Investment Return Information

 

[kcowan]

Because we are value buy-and-hold, we do 2x yearly stock evaluations: April and October. This is not rebalancing and adds and drops.

 

[Milkman]

I have always been in the habit of making my IRA contribution in January. I also let my dividends accumulate in cash during the course of the year (opposed to automatic dividend reinvestment). The combination of these two sources of funds is usually sufficient to reinvest in certain categories in order to bring investments into my chosen asset allocation. Usually I don't have to sell anything. Therefore, I keep investment costs down.

I usually rebalance my 401k at the same time with a few computer clicks because I'm thinking about it.

Milkman