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Rebalancing Approaches
Old 04-30-2004, 06:15 AM   #1
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Rebalancing Approaches

I would be interested in timing and triggers used by many on this board to rebalance their portfolio allocations. This has been mentioned some, but I didn't find a conversation specifically devoted to various strategies. I recently found the following paper which I thought was interesting:

It's relatively old, early 90's, but may provide some relevant data. I believe it deals with institutional type portfolios and the re-balancing relates to basic stock and non-stock % without getting into any kind of sub allocations.

The paper discusses 2 major classes of approach, calendar based and target/range based (e.g., Larry Swedroe's approach). Gives some performance numbers on calendar (monthly, quarterly, annually) in which more frequent does best, and target/range in which bringing back out of range allocations all the way to target rather than just to within range does best.

Which do you use or do you use a combination? Do you handle sub-allocations any differently than the basic stock/non-stock split? Thanks! Bill

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Re: Re balancing Approaches
Old 04-30-2004, 09:10 AM   #2
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Re: Re balancing Approaches

Hi WilliamG,

About 1/3 of my total portfolio is invested in Target
Retirement 2025 in my wife's IRA and our after
tax funds. We do not plan to touch those funds
for at least 7 years when my wife turns 70. The
other 2/3 is in my IRA with the stock allocation in
6 different stock index funds at 10% each. and
short term corporate at 40%. I recently converted
my IRA from Target Retirement 2025 in order to
manage withdrawals more efficiently (I am 70).
I need to withdraw about 6% annually from the IRA
for living expenses.

Vanguard limits exchanges out of many of their
index funds to 2 in a 12 month period. I plan to
re-balance annually sometime in late December of
each year. However, I am still thinking about
exactly how to do it.

The most straightforward approach would be to
re-balance back to a 60/40 allocation and bring
each stock fund back to 10%. Somehow this smacks
of "reverse dollar cost averaging" which would cause
a buy high sell low result.

Intuitively it makes some sense for my situation
to hold the stock allocation to a fixed dollar
amount which would be increased by the annual
inflation rate each year. The 6 stock index funds
would be re-balanced equally within this fixed dollar

Over time, this would cause the 60/40 split to drift either higher or lower. It is hard to guess which right now. At present, my 40% allocation to Short Term Corporate represents about 6.5 years of withdrawal.
If past is prologue, the 60% current allocation to
stocks should, on average, replenish the bond fund
at approximately the rate it is being drawn down.

Whichever way it goes, I can always fine tune later.

For somebody in the accumulation phase, this strategy
would not be appropriate. In that case, I would
use the KISS method and bring everything up to snuff
once or twice each year.

Somebody please let me know if my thinking is all wet!


Charlie (aka Chuck-Lyn)

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Re: Rebalancing Approaches
Old 04-30-2004, 11:14 AM   #3
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Re: Rebalancing Approaches

Somebody please let me know if my thinking is all wet!


Charlie (aka Chuck-Lyn)
I cannot speak in general. But on this particular point, you are exactly right:
The most straightforward approach would be to
re-balance back to a 60/40 allocation and bring
each stock fund back to 10%. Somehow this smacks
of "reverse dollar cost averaging" which would cause
a buy high sell low result.
Prices fluctuate a lot. My guess is that you can get a really good price about once every two or three years. It is probably a good idea to have enough flexibility so that you can make up to three years worth of withdrawals at the same time.

I have not looked into the details. I do know that reverse dollar cost averaging is expensive.

Have fun.

John R.
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