re-balancing granularity

[bingybear]

I understand the basics of re-balancing. Pretty simple. You start with your preferred AA. Then as the market ebbs and flows one readjusts back to the original AA based on time or the amount the AA has drifted.

Some use few investments to implement their portfolio such as VTI, VXUS and BND. Three parts making up a portfolio is easy to re-balance.

My question, would it make sense to use multiple assets to replace VTI so I'd benefit from re-balancing during the ebb and flow of the US market. I could see breaking it up by style box or other methods. If there is a benefit from re-balancing the 3 fund portfolio, would one not benefit from re-balancing after tech or other sectors out perform?

 

[mrfeh]

Rebalancing is about risk management, not improved returns. While you may see improved returns, you may just as easily not. There have been lots of studies done, and I'm not aware of any that indicate more frequent/sector rebalancing is a path to better performance. In Jim Otar's book, I think his research showed that rebalancing once every 4 years came out on top. Of course, that was in the past; who knows about the future.

in summary - no, I wouldn't bother doing what you're considering.

 

[bingybear]

I was not implying re-balancing more often. I was posing the question if more pieces (investments) such as breaking up VTI into pieces, say LCG, LCB, LCV, and Mid/small cap.

Much of recent market gains from what I hear on the news (maybe a bad source) is due to tech. If true, I would think re-balancing would be a positive thing.

 

[mrfeh]

I was not implying re-balancing more often. I was posing the question if more pieces (investments) such as breaking up VTI into pieces, say LCG, LCB, LCV, and Mid/small cap.

If you do this, you will surely be rebalancing more often.

Much of recent market gains from what I hear on the news (maybe a bad source) is due to tech. If true, I would think re-balancing would be a positive thing.

Not if tech continues to out-perform.

And I'm not saying it will, but rather that none of us knows. So, why complicate things?

 

[pb4uski]

I actually considered doing this in my Roth but with sectors rather than with styles. I would have sold Total Stock bought Vanguard sector ETFs in proportions that reflected the total stock market. And then periodically rebalanced to try to get the benefits of rebalancing (sell high/buy low).

My modeling in portfolio visualizer suggested that the benefit was about 50 bps on average, and 64 bps for 2007-2018. I still haven't pulled the trigger yet tho... not sure it is worth the effort for such a small part (14%) of my portfolio.

 

[bingybear]

Not if tech continues to out-perform.

And I'm not saying it will, but rather that none of us knows. So, why complicate things?

Yes, I don't know if tech will continue or not. I'm just using that as an example. If the US market out performs the international to a level that one would rebalance (or time if one is re-balancing by time), I'd assume it would be rebalanced. Or you just buy a world fund and there is no need to rebalance. Like tech, one does not know if VTI will continue to out perform in this assumed case.

My example goes from 3 funds to 6 funds. I'm using this as an example, not what I'm planning on using at this point. VTI is such a large part of my AA.

Maybe my example of how to make more pieces is far from ideal or maybe 3 is just a magic number.

 

[mrfeh]

If the US market out performs the international to a level that one would rebalance (or time if one is re-balancing by time), I'd assume it would be rebalanced. Or you just buy a world fund and there is no need to rebalance. Like tech, one does not know if VTI will continue to out perform in this assumed case.

If there was a world equities fund with my chosen US/ex-US allocation, with a very small expense ratio, I would buy it. But, there isn't, so I use total US and total ex-US funds and rebalance myself.

 

[bingybear]

I actually considered doing this in my Roth but with sectors rather than with styles. I would have sold Total Stock bought Vanguard sector ETFs in proportions that reflected the total stock market. And then periodically rebalanced to try to get the benefits of rebalancing (sell high/buy low).

My modeling in portfolio visualizer suggested that the benefit was about 50 bps on average, and 64 bps for 2007-2018. I still haven't pulled the trigger yet tho... not sure it is worth the effort for such a small part (14%) of my portfolio.

pb, this is the concept I and considering. There has to be some range of investments where it makes sense. What are you using to model this?

 

[pb4uski]

Early on I did some analysis in Excel... but more recently I use Portfolio Visualizer. Portfolio #1 is VTI and Portfolio#2 is Vanguard sector funds based on their VTI weightings. I set it to rebalance annually. I think that this link will work.

 

[mrfeh]

Early on I did some analysis in Excel... but more recently I use Portfolio Visualizer. Portfolio #1 is VTI and Portfolio#2 is Vanguard sector funds based on their VTI weightings. I set it to rebalance annually. I think that this link will work.

IMO, using only 10 years of data in such an exercise is a mistake. Especially the last 10.

 

[pb4uski]

Well then just select whichever years that you want. The only limits will be that you can't go back further than when the sector funds started (2005 I think)... but you could use other sector funds.

 

[bingybear]

If there was a world equities fund with my chosen US/ex-US allocation, with a very small expense ratio, I would buy it. But, there isn't, so I use total US and total ex-US funds and rebalance myself.

I can understand wanting to have a defined home country/ everyone else allocation. If a true world fund had the right US/XUS allocation at a given point in time, it would wander over time unless every thing was tracking (unlikely over the long haul).

Is there good reason that dicing the allocation is can't be divided up a few more ways? I think some have touted there are 12 asset classes and set those up for rebalancing (define AA percentages).

At some point there are too many and it becomes a pain or expensive to rebalance. I guess I'm wondering if a some point does it rebalancing effectively become useless as the number of assets increase.

 

[mrfeh]

Is there good reason that dicing the allocation is can't be divided up a few more ways? I think some have touted there are 12 asset classes and set those up for rebalancing (define AA percentages).

Folks can do whatever they want. I'm just not aware of any benefit.

 

[walkinwood]

With more distinct asset investment and rebalancing between them, you may very well lower your risk.

However, unless these investments are in tax sheltered accounts, you will end up paying more in taxes from more distributions and your rebalancing. Also, if you wish to simplify in the future, you'll end up with taxes on the gains as you change your portfolio composition.

I face that problem now. I want to consolidate to fewer funds, but the tax cost of doing so in one shot is prohibitive to me, so I have to do it slowly to keep the cap gains taxes to a minimum.

 

[pb4uski]

Folks can do whatever they want. I'm just not aware of any benefit.

Rebalancing does have advantages. You can play around with the same portfolio with and without rebalancing in Portfolio Visualizer for different periods. For example, 60% Total Stock Adm and 40% Total Bond Adm

Jan 2002 to Mar 2018: no rebalancing 6.69%, annual rebalancing 6.94%
Jan 2008 to Dec 2017: no rebalancing 7.03%, annual rebalancing 7.38%
Jan 2002 to Dec 2012: no rebalancing 5.14%, annual rebalancing 5.71%

 

[easysurfer]

IMO, more beneficial to keep simple and use few investments.

Kind of like stirring soup before it boils on the stove. Stirring is needed, but too much stirring and that becomes counterproductive to the desired goal.

 

[sengsational]

It's all about correlation; if you spread out to more things that are highly correlated, you get no reduction in risk.

 

[OldShooter]

I think there is a sort of logical inconsistency here. Many of us, apparently includng the OP, understand that a mountain of evidence shows that stock picking doesn't work over the long term. Hence, passive investing, hence investments like VTI.

Inconsistency #1 is that even though it is impossible to pick stocks successfully, here one is saying that it is possible to pick sectors successfully. There seem to be quite a number of people on this forum who believe that. I don't see why picking sectors is likely to be any less futile than picking stocks.

Inconsistency #2 is to think is anything special about a particular day's sector composition of a fund like VTI. If you observe that today VTI is 70% US Large Caps, would you then put 70% of your portfolio into a Russel 1000 fund? Why not use the VTI large cap percentage from last week? Last month? Last year? And going forward, if you buy sector funds based on their VTI percentage today, won't they "ebb and flow" in your portfolio almost the same as they ebb and flow within VTI? So "rebalancing" would simply involve adjusting sector weightings back to match VTI's weightings some arbitrary date?

And why worry about VTI at all if headed down this path? Just pick a sector allocation that you like and keep rebalancing to it.

Maybe I don't get it.

One other thought: Where I have seen automatic rebalancing among conventional asset-classes (equities, fixed, etc.) cited by robo-visors as one of their advantages, they only claim a fifty basis point improvement in total return. So I think many of us think that rebalancing is a bigger deal than it really is. I saw a post a week or two ago where the poster was rebalancing whenever his AA moved off target as measured in basis points. Amazing to me, though YMMV.

 

[pb4uski]

#2 above is a bit of an issue because sector weights wobble around some... easily solved by using a long-term moving average or something like that... in reality I would probably just use the U.S. total stock market sector weightings from Vanguard's Portfolio Watch.... the weightings don't matter as much... even with equal weighting annual rebalancing outperforms no rebalancing.

Same principle... use a disciplined methodology to buy low and sell high.

 

[SecondCor521]

I saw a post a week or two ago where the poster was rebalancing whenever his AA moved off target as measured in basis points. Amazing to me, though YMMV.

That was probably me.

To clarify, my official policy is to check my portfolio once a year and rebalance only if it is out of whack by 2 percentage points or more (i.e., target AA is 90/10, rebalancing would happen outside 92/8 or 88/12).

Because my portfolio and my FIRE is pretty much on autopilot AND because rebalancing is easy and free (inside my IRA with Vanguard funds) AND because I joke about being OCD AND because the market has been choppy lately AND because I think there isn't much downside to frequent rebalancing AND if I'm bored and happen to check my AA and see that it's out of whack AND if I'm off by more than just 5 or 10 basis points, THEN I'll rebalance.

At the moment I'm off by 24 basis points and haven't bothered rebalancing since the 24 basis points is in the direction I want my AA to drift over time anyway.

I harbor no illusions that I'm doing anything that produces any measurable benefit other than soothing my pseudo-OCD, and I can quit any time I want to. Really.

 

[NYEXPAT]

I was not implying re-balancing more often. I was posing the question if more pieces (investments) such as breaking up VTI into pieces, say LCG, LCB, LCV, and Mid/small cap.

Much of recent market [-]gains[/-] losses from what I hear on the news (maybe a bad source) is due to tech. If true, I would think re-balancing would be a positive thing.

FIFY, The SOX is currently in a bear market!

 

[OldShooter]

#2 above is a bit of an issue because sector weights wobble around some... easily solved by using a long-term moving average or something like that... ...

Isn't this pretty much saying that the choice of sector weights is arbitrary and that the act of rebalancing to these arbitrary weights is the secret sauce? That doesn't make any sense to me. What if you picked an allocation during the tech bubble or during the housing bubble?

... I can quit any time I want to. Really.

OK. Whatever turns your crank. Life would be pretty boring if our activities were limited to doing only things that are logical. The key, IMO, is self-understanding.

 

[pb4uski]

Isn't this pretty much saying that the choice of sector weights is arbitrary and that the act of rebalancing to these arbitrary weights is the secret sauce? That doesn't make any sense to me. What if you picked an allocation during the tech bubble or during the housing bubble? ...

Not at all arbitrary. I presume that Vanguard has some sensible measure that they use in determining sector weightings for the purpose of the Portfolio Watch analysis.... I use those because it is convenient. If that wasn't available then would likely use a 3 or 5 year moving average of quarterly sector weights or something like that so the targets would move slowly and more in line with big picture changes than arbitrary market movements.

Rebalancing prods your to sell sectors that have had a good run and buy sectors that have not... just like it prods you to sell equities when they have had a good run or buy them when they have not.

 

[samclem]

Rebalancing does have advantages. You can play around with the same portfolio with and without rebalancing in Portfolio Visualizer for different periods. For example, 60% Total Stock Adm and 40% Total Bond Adm

Jan 2002 to Mar 2018: no rebalancing 6.69%, annual rebalancing 6.94%
Jan 2008 to Dec 2017: no rebalancing 7.03%, annual rebalancing 7.38%
Jan 2002 to Dec 2012: no rebalancing 5.14%, annual rebalancing 5.71%

Over time, rebalancing tends to >reduce< returns (slightly). That is because, in general, the assets with the highest volatility also have the highest returns. If we never rebalanced, our portfolios, over time, would tend to accumulate more and more of the highest return assets, and the portfolio as a whole would have higher returns. And higher volatility.

At one time I considered dividing my taxable US holdings into a lot more parts--using sector ETFs in place of the Total Market fund. I don't think I'd get higher returns, but there would be increased opportunity for tax loss harvesting as sectors gained and lost favor over the short term. To stay fully invested you'd need to find a few similar low-cost sector ETFs that you could buy into/sell out of. I don't know if the IRS would smile on this, or call it a violation of the wash sale rules.

 

[pb4uski]

Over time, rebalancing tends to >reduce< returns (slightly). ....

The data says otherwise and I think it makes sense.... to the extent that a single asset class or sector ebbs and flows, rebalancing takes advantage of those ebbs and flows in a disciplined manner.