2020 : 5% rebalance band made little difference

[walkinwood]

I have been kicking myself for not having rebalanced all the way back to my target AA (60/40) when my 5% rebalance band was reached. ie. my portfolio hit 55/45.

I created a simple spreadsheet using only VG's intermediate treasury fund (VFITX) and VG's total market (VTSAX) from 1/1/2020 to 8/2/2020 and the following :
- Portfolio was at 60/40 on 1/1/2020
- Dividends stayed in cash until it was time to rebalance. ie. dividends were not reinvested. This mirrors my personal choice since I'm ER'd and need the cash.
- When the 5% band was breached, the portfolio was rebalanced to 60/40
- No taxes.

The data came from Yahoo finance which made it easy to download the historical prices and dividend information.

I found very little difference in the end value of the portfolio (to 8/2). A 7.18% increase in the no-rebalance portfolio v/ a 7.9% increase in the rebalanced one. On a $1MM portfolio, that translated into an extra $7134.

Nothing to sneeze at, but nothing to beat myself about either. Also, these small differences can add up to a substantial difference over many rebalance events.

I don't intend to share my spreadsheet & I could have made an error in it.

Has anyone else done a calculation like this? I'd like to see if you're reaching the same conclusion.

[Animorph]

I agree for the most part. I try to over-balance, increasing stocks by 5% of the portfolio for each 10% market drop. So I start at 75/25 and overbalancing starts when stocks hit 20% down, rebalancing to 80/20. Even so, even if the market hits 40% down I'm only adding about 10% after a full recovery. Maybe 3% for this latest dip, which only hit 30% down.

While nowhere near the gains possible with going 100% cash and extremely lucky timing, I hope it's enough to make up for having bonds in the first place. It makes me feel like I'm doing something, and it's not too much work yet.

[audreyh1]

Quote:

Originally Posted by walkinwood I found very little difference in the end value of the portfolio (to 8/2). A 7.18% increase in the no-rebalance portfolio v/ a 7.9% increase in the rebalanced one. On a $1MM portfolio, that translated into an extra $7134.

That is a significant difference - 10% better.

[COcheesehead]

A 10% increase is “very little difference”? As you said, “small differences can add up to a substantial difference over many rebalance events”

I’d take an additional 10% here and there.

If you pick a strategy, stick with it.

[SecondCor521]

I don't calculate those kinds of things because I cannot go back and change the past. I know I've made mistakes, and I know the biggest ones, and I'll try not to make those again regardless of the precise dollar amount. My divorce was more costly than my library fines even though I don't know how much exactly each of those cost.

However, I do similar sorts of calculations when trying to plan between different alternatives for the future in order to determine how to prioritize what to focus on, and whether implementing a complicated plan is feasible and worth the hassle.

For example, I've got a decent enough plan of attack on Social Security and the variation in that plan is low enough (compared to the potential variation in results based on my longevity and my assumptions about the discount rate) to where I likely won't spend any more time or thought on potential improvements.

As another example, I decided that switching to an HSA-qualified HDHP and doing an HSA created a large enough benefit to be worth doing. The rough calculation was 14 years of $3550 converted to my Roth without tax consequences seemed large enough to me compared to some minor hassle in tax filing and another account to deal with.

(To be complete, I also just sometimes nerd out and fixate on something that I can save money on even though there may be bigger fish to fry. But as I get older I try to put things into perspective. I very likely have enough money but time and health become more the issues that I should pay attention to.)

[donheff]

I have read some research indicating that it doesn't make a lot of difference over the long haul but that change over the short haul is significant. I rebalanced and a bit more partway down and continued to intentionally move my AA from 60/40 toward 70/30. I'm currently at 67/33 but am reluctant to go any further since I keep expecting a second deeper crash that will last a long time. If we do eventually get such a crash I plan to rebalance as we go down.

Edit: Right after visiting here I found a new post by "Big Ern" on rebalancing. I barely skimmed it but he seems to conclude that there isn't much advantage to it, or at least not a frequwnt rebalance approach.

[kgtest]

I've run these "what-ifs" for rebalance and doneff nailed it. Over the long haul, I've seen studies posted here with 60/40 vs 55/45... or 65/35 vs 60/40 and over the long term, its smaller variance than just the 3mos/6mos/1 year dates you are reviewing.

The key is to NOT ALWAYS be lazy when it comes to the rebalance. Next time, just make up for it, jump on it right away, and it will normalize out.

I was slow and decided instead of rebalance just DCA into SmallCaps...worked ok but as you say had I actually just done the rebalance I would be up a little more... I am already like 98% equities but when I rebalance its more like buying and selling small/large caps.

[mrfeh]

Rebalancing isn't about increasing return (although it might). It's about maintaining your desired risk.

[audreyh1]

Quote:

Originally Posted by mrfeh Rebalancing isn't about increasing return (although it might). It's about maintaining your desired risk.

Yes! It can certainly enhance your return under certain circumstances, however, the goal is to reducing overall volatility and taking advantage of divergence between asset classes to give you a better risk-adjusted return.

[OldShooter]

Quote:

Originally Posted by mrfeh Rebalancing isn't about increasing return (although it might). It's about maintaining your desired risk volatility.

FTFY

Risk is Enron, Spirit Aerospace, GE, Sears Holdings, Worldcom, Tesla, ... etc. SORR is real but volatility itself is not risk. In fact volatility is desirable in a DCA strategy.

[big-papa]

Many studies out there on rebalancing. Problem is that the amount of difference it might make, like so many other things in investing, really depends on the exact time period you use for any sort of backtest. And even then, most studies show only a little difference. Might be 10% up for one time period, 10% lower for another time period, etc. What is consistent, though, is that the overall difference isn't all that big over long time periods - it's essentially in the noise.

As long as you do something you can live with and actually follow it, you'll be fine. If, however, you deliberately hold off on a rebalance, because you think stocks may go higher (or lower), then you're moving into market timing territory and all bets are off.

Pick something you can live with: periodic rebalancing, absolute rebalancing bands, relative rebalancing bands, asymmetric rebalancing bands, combinations of any of the above, but stick with it and don't try to guess the market.

Cheers
Big-Papa

[kaneohe]

Quote:
Originally Posted by walkinwood View Post
I found very little difference in the end value of the portfolio (to 8/2). A 7.18% increase in the no-rebalance portfolio v/ a 7.9% increase in the rebalanced one. On a $1MM portfolio, that translated into an extra $7134.

Quote:

Originally Posted by audreyh1 That is a significant difference - 10% better.

That's one way of looking at it.......the relative values of the increase.
I think OP is thinking of the absolute values of the ending portfolio balance.....
in this case 0.72% or $7134 difference on 1M portfolio which may be simpler to understand.