automatic rebalancing?

[Ed_The_Gypsy]

I just ran across an interesting idea: it appears that Schwab will automatically re-balance your portfolio within bands or on a schedule. There may be limitations on this.

Who else does this? Does Vanguard? (I have e-mailed them but they seem to be very busy today.)

Cheers,

Gypsy

 

[MasterBlaster]

Who else does this? Does Vanguard? (I have e-mailed them but they seem to be very busy today.)

I believe that Fidelity has an option for automatic rebalancing.

For your info, John Bogle (of Vanguard) suggests you never rebalance or at least consider it optional:

http://seekingalpha.com/article/41119-vanguards-jack-bogle-on-rebalancing-dont

<Quoting Bogle>
We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.
We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big. (I’m asking my good right arm, Kevin, to send the detailed data to you.)
My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.
In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.

 

[Options]

I believe that Fidelity has an option for automatic rebalancing.

For your info, John Bogle (of Vanguard) suggests you never rebalance or at least consider it optional:

http://seekingalpha.com/article/41119-vanguards-jack-bogle-on-rebalancing-dont

Saw this interview with Bogle. The whole rebalancing debate has gone on for what seems like forever and appears to me to be akin to

The true value of rebalancing isn't to pursue some "rebalance bonus", but to stay within one's risk tolerance mitigating the chance one will "do something" (sell, time, etc.) when the market does what it invariably does. Behavioral finance is a huge factor here.

 

[audreyh1]

I would never use automatic rebalancing as I don't reinvest distributions, and my withdrawal has a large effect what would ultimately rebalanced, and I'm careful about rebalancing in a tax efficient way. I can't see any automatic program handling this in a way that minimizes taxes.

IRA - it wouldn't matter.

During accumulation phase - it might make sense.

 

[sengsational]

The easily offended should avoid this, but DW and I had a great laugh just now...the red text...Imgur: The most awesome images on the Internet

 

[hnzw_rui]

I would never use automatic rebalancing as I don't reinvest distributions, and my withdrawal has a large effect what would ultimately rebalanced, and I'm careful about rebalancing in a tax efficient way. I can't see any automatic program handling this in a way that minimizes taxes.

Should be possible. That's what Robo-advisors such as Betterment and Wealthfront already do. Caveat, you probably need to keep all assets with Betterment/Wealthfront or you might be faced with wash sales.

 

[ziggy29]

The true value of rebalancing isn't to pursue some "rebalance bonus", but to stay within one's risk tolerance mitigating the chance one will "do something" (sell, time, etc.) when the market does what it invariably does. Behavioral finance is a huge factor here.

Right. I don't see rebalancing as a way to significantly increase returns, but it is something which can help you stay within a target allocation range, and have the side effect of selling some pricier stuff to buy cheaper stuff. And, of course, it seeks to eliminate the twin emotional portfolio-killers -- fear and greed -- from the equation. One good thing about the automatic way is that it takes *all* emotion out of it, but on the other hand, you can't always control the timing and, as said already, in a taxable portfolio you lose the flexibility to rebalance in the most tax-effficient way possible. (In reality I barely rebalance my taxable accounts at all, but save that for the tax-deferred accounts which are more than 80% of my portfolio.)

 

[LOL!]

In the SeekingAlpha article, Bogle is quoted as saying they found a benefit to rebalancing. It was not large, but it was certainly larger than the difference in expense ratios between say a Vanguard fund of Investor class and the same fund's Admiral class. In other words, not rebalancing imposed a cost on one's portfolio.

So is Bogle saying that costs don't matter and paying an extra cost just to avoid rebalancing is worth it?

No, Bogle is saying don't pay a cost higher than the gain from rebalancing. That is, don't pay someone 1% to rebalance your portfolio.

So when rebalancing, costs matter. That means do your rebalancing in a cost efficient and tax efficient manner. If you have to pay taxes or pay commisssions or pay fees in order to rebalance, then consider the trade-offs in costs.

If you don't have to pay taxes nor commissions nor fees, then rebalancing is probably to your benefit.

In the real world it can be tricky. There are parts of one's portfolio where rebalancing might be easy, such as a Roth IRA holding Vanguard funds at Vanguard, so simple exchanges are without costs. But there are other parts such as a joint taxable account with a mixture of positions with unrealized long-term gains, short-term gains, and losses. It gets trickier deciding which positions to move around to rebalance.

I don't think any "rebalancing study" can account for all the personal and individual nuances and subtleties of a moderately complicated portfolio. I know my rebalancing bonus for 2016 is already above 0.7% and the year is only a quarter of the way through.

In other words, I would not trust any automatic rebalancing algorithm nor provider with my portfolio.

 

[MasterBlaster]

So is Bogle saying that costs don't matter and paying an extra cost just to avoid rebalancing is worth it?

Bogle is saying that either rebalancing or not rebalancing are within the statistical error margin. Statistically both are equivalent.

 

[audreyh1]

Should be possible. That's what Robo-advisors such as Betterment and Wealthfront already do. Caveat, you probably need to keep all assets with Betterment/Wealthfront or you might be faced with wash sales.

I'll just do it myself.

Wash sales - yep, another danger of rebalancing if you don't watch it. Especially if you automatically reinvest distributions.

 

[CRLLS]

I just ran thru this with my Fidelity rep. There seemed to be little difference between the two for long term gains. The benefit goes to Rebalancing based on the volatility of the portfolio thru-out the period. I think I'll stay with my current method of buy and hold.

 

[Ed_The_Gypsy]

I would never use automatic rebalancing as I don't reinvest distributions, and my withdrawal has a large effect what would ultimately rebalanced, and I'm careful about rebalancing in a tax efficient way. I can't see any automatic program handling this in a way that minimizes taxes.

IRA - it wouldn't matter.

During accumulation phase - it might make sense.

Hi, Audrey,
It looks like you are using what Kirkpatrick called "Rebalancing" (rebalancing by way of withdrawals), which makes a lot of sense.

By the way, I called Vanguard. They won't do automatic rebalancing for ETFs. They might do it if the assets were Vanguard mutual funds, but I did not inquire further.

I do not have to worry about tax efficiency. All in IRAs. Most interested in reduced volatility with good payback.

 

[audreyh1]

Hi, Audrey,
It looks like you are using what Kirkpatrick called "Rebalancing" (rebalancing by way of withdrawals), which makes a lot of sense.

By the way, I called Vanguard. They won't do automatic rebalancing for ETFs. They might do it if the assets were Vanguard mutual funds, but I did not inquire further.

I do not have to worry about tax efficiency. All in IRAs. Most interested in reduced volatility with good payback.

In at least one version of Kirkpatrick he was using withdrawals to rebalance, but not going all the way back to the target AA if the withdrawal was less than what was needed to rebalance. In his models he wasn't dealing with my case which is taking the withdrawal from distributions.

In the past I have made my withdrawal from the cash accumulated from distributions, and then rebalanced the remainder, selling more from some funds that are still above target, and putting any cash remaining from distributions into funds below target. I really only do this if a fund is off by several thousand.

It usually turns out that the funds that go up more in a given year pay out more in distributions, so by no reinvesting the distribution, the fund is already brought much closer to target.

Anyway - I'll probably not do any extra selling just for rebalancing in the future, and instead let my asset allocation drift a bit. Yes, if I have cash left over from distributions after withdrawal, I'll put that in the under allocated funds. If I don't have enough cash from distributions to cover my withdrawal in a given year, I'll take the extra needed from my highest performing funds. But I may not bother with the rest of it in the interest of tax efficiency and simplicity until the allocation gets dramatically out of balance.

 

[CaliforniaMan]

I was wondering myself if there was any "magic" to this rebalancing thing. So I setup a quick and dirty spreadsheet to test different rebalance bands on return and volatility. Used CAGR for returns and Std Err of the regression on log price for variability. I just looked at returns with zero withdrawals and a 70/30 stock/bond portfolio.

Unsurprisingly, I guess, over long periods (monthly data from 1900) the less rebalancing the greater the returns. Of course because the stock percentage kept growing. The more rebalancing the lower the returns, there was no magic middle.

Looking at the monthly data from 1900 on, the STE plot was pretty flat with 0% (rebalancing every other month) up to 30% rebalancing band then increased volatility with larger rebalance bands.

Over 15 or 20 year periods there was a bit of bouncing around for both and except for a very few periods such as the 20 year period from 1970, the less rebalancing you did the better in terms of CAGR.

From what I saw you gain a little less volatility from rebalancing but not more often than using a 10% to 20% off band.

No magic from what I can tell. Just seemed to me rebalancing for the most part doesn't do much and rebalancing more often than using a 10% to 20% off band or more than once every year or two would not be worth the trouble.

I was hoping I would see some predictable or repeatable gain to rebalancing but unfortunately I didn't. I guess there is still no free lunch

 

[audreyh1]

Rebalancing, but in taxable accounts - optimum was something like 18 months according to one study long ago. Rebalancing more often than once a year isn't very useful - you need time to allow assets to diverge.

 

[hnzw_rui]

Right. I don't see rebalancing as a way to significantly increase returns, but it is something which can help you stay within a target allocation range, and have the side effect of selling some pricier stuff to buy cheaper stuff. And, of course, it seeks to eliminate the twin emotional portfolio-killers -- fear and greed -- from the equation. One good thing about the automatic way is that it takes *all* emotion out of it, but on the other hand, you can't always control the timing and, as said already, in a taxable portfolio you lose the flexibility to rebalance in the most tax-effficient way possible. (In reality I barely rebalance my taxable accounts at all, but save that for the tax-deferred accounts which are more than 80% of my portfolio.)

+1. Some things I've learned about myself when I dabbled with ETFs, apparently I can't be trusted to rebalance the portfolio when necessary. I also tinker too much (I just change my IPS to suit).

Hence, to minimize my bad behavior, I moved almost all investments to Target 2040. I don't have taxable investments yet. Instead of starting taxable, I'm borrowing my parents' Roth IRA space. It's a small amount anyway and if my parents need help, I can give them the funds in the Roth IRA.

I've been looking at distributions from Vanguard's target date funds. For someone in decumulation mode, they seem to be relatively tax efficient despite the bond and international holdings (or perhaps that might be a side effect of low yields?) so I am considering just sticking with TDF when I start my taxable (likely when parents retire).

 

[gauss]

I just own Vanguard Balanced mutual funds (in taxable and retirement accounts) and no longer think about it or look at account balances when the market is down.

-gauss

 

[audreyh1]

I think balanced funds are a great way to have automatic rebalancing.

 

[hnzw_rui]

I think balanced funds are a great way to have automatic rebalancing.

Yup. Looking at distributions, that seems to be the case. Balanced funds can rebalance using cash inflow/outflow which to me, seems far more tax efficient than what I'd be able to do with 30+ years worth of gains built up.

Anyway, I don't have to think about taxable investing until my parents retire but I'm leaning towards going with balanced funds there, too.

 

[gauss]

What's nice about balanced funds is the lack of emotional toll it takes on you to buy more in a down market or, to a lesser extent, sell in an up market.

BTW - I did not move into the Balanced Funds until after I ERd. When I was still working I liked to try to optimize my portfolio, try to time the market etc with hopes of reducing my time to FI.

Now that I have achieved my goal and ERd I think it is too high risk to fool around with it. I just want to let it be and enjoy the life I have built for myself.

-gauss

 

[hnzw_rui]

BTW - I did not move into the Balanced Funds until after I ERd. When I was still working I liked to try to optimize my portfolio, try to time the market etc with hopes of reducing my time to FI.

Apparently, I suck at market timing, too. Hence, going full auto (investing and rebalancing) is better. No need to optimize for tax efficiency as I only have tax advantaged accounts right now.

 

[NW-Bound]

I was wondering myself if there was any "magic" to this rebalancing thing. So I setup a quick and dirty spreadsheet to test different rebalance bands on return and volatility. Used CAGR for returns and Std Err of the regression on log price for variability. I just looked at returns with zero withdrawals and a 70/30 stock/bond portfolio.

Unsurprisingly, I guess, over long periods (monthly data from 1900) the less rebalancing the greater the returns. Of course because the stock percentage kept growing. The more rebalancing the lower the returns, there was no magic middle.

Looking at the monthly data from 1900 on, the STE plot was pretty flat with 0% (rebalancing every other month) up to 30% rebalancing band then increased volatility with larger rebalance bands.

Over 15 or 20 year periods there was a bit of bouncing around for both and except for a very few periods such as the 20 year period from 1970, the less rebalancing you did the better in terms of CAGR.

From what I saw you gain a little less volatility from rebalancing but not more often than using a 10% to 20% off band.

No magic from what I can tell. Just seemed to me rebalancing for the most part doesn't do much and rebalancing more often than using a 10% to 20% off band or more than once every year or two would not be worth the trouble.

I was hoping I would see some predictable or repeatable gain to rebalancing but unfortunately I didn't. I guess there is still no free lunch

If rebalancing hurts returns over long periods, then it is because over long periods stocks outperform bonds. So, the corollary is then one should be 100% in stocks, again over long periods.

But how about shorter periods? How about when one is in drawdown phase and no longer accumulating? Is there any point where having less than 100% stock helps?

In answering these age-old questions, we will keep reinventing the wheel, but that is fine. We want to be sure that we get a round wheel instead of a hexagonal or an oval one.

 

[CaliforniaMan]

If rebalancing hurts returns over long periods, then it is because over long periods stocks outperform bonds. So, the corollary is then one should be 100% in stocks, again over long periods.

But how about shorter periods? How about when one is in drawdown phase and no longer accumulating? Is there any point where having less than 100% stock helps?

In answering these age-old questions, we will keep reinventing the wheel, but that is fine. We want to be sure that we get a round wheel instead of a hexagonal or an oval one.

Yes of course you are correct. I didn't delve into any of those other questions, I think FIRECalc probably answers them as well as they can be. I was just curious if there was any "magical" clearly consistent benefit to various rebalancing bands alone. My conclusion that there was not. Some periods, some bands improved performance, but not by much and not very often. These were times the bands just happened to occur during a market drop and rise, but it is entirely dependent on what time period you pick, just like trying to use various moving averages to time the market.

So I give up on finding any magic, will just rebalance once a year when I make withdrawals. Hey, I really didn't expect to find anything and just found what was expected, you can't beat Mr. Market .

 

[NW-Bound]

I am sorry that I was not clear. I was hoping that I could entice you to look at your runs at another facet, to examine the results from a different view, as I am too lazy to do my own work. But I was also raising some ramifications from Bogle's assertion as quoted by another poster, that we should not bother to rebalance at all.

Again, if rebalance does not help, and stocks beat anything else, we should all go 100% equity. Yet, Bogle also says to have some bonds. Why?

 

[mh]

I am sorry that I was not clear. I was hoping that I could entice you to look at your runs at another facet, to examine the results from a different view, as I am too lazy to do my own work. But I was also raising some ramifications from Bogle's assertion as quoted by another poster, that we should not bother to rebalance at all.

Again, if rebalance does not help, and stocks beat anything else, we should all go 100% equity. Yet, Bogle also says to have some bonds. Why?

Maybe the idea is that at the start of your withdrawal phase you want some bonds to protect against early volatility -- as time goes on your existing initial allocation of bonds is enough to fulfill that requirement ?


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