Rebalancing Strategy

[DblDoc]

The rebalancing issue has been discussed extensively on bogleheads as well. My take from it all is that it doesn't really help/hurt returns significantly - but it does manage your level of risk. I use 5% absolute for the bigger chunks and then 25% relative changes for the small slices. ie my Domestic equity is 36% of my AA so it can vary from 31-41% before triggering a rebalance. My EM is 5% so it can vary 5 +/- 0.25*5 so it can vary from 3.75% to 6.25%

I had been running pretty close to my AA until this past 2 weeks. I checked on monday after the drop and I still had not hit my bands and actually had a fair ways to go so no rebalance yet for me.

DD

 

[DblDoc]

P.S. And, um, you're not supposed to let the market rebalance your AA for you LOL!

No one was complaining in 2010 when it was bringing their equities back up

DD

 

[GregLee]

I feel that band width should be proportional to the standard deviation of the DJIA. (Just kidding.)

 

[audreyh1]

No one was complaining in 2010 when it was bringing their equities back up

DD

Those who "forgot" to rebalance when they were out of balance, that is. LOL!

Audrey

 

[RunningBum]

When I had a bonus come in (when I was w*rking), pared off some company stocks or options, converted a 401K to IRA, or pulled out money from my taxable account for some large expense, I use that as an opportunity to rebalance. I also look once a year around my birthday. Last year I knew I had some converting and shifting of assets so I just planned to fix the AA then. I should probably check to see where I'm at right now.

 

[Gone4Good]

No one was complaining in 2010 when it was bringing their equities back up

DD

I didn't complain, but I "rebalanced" my equity allocation down about 15 percentage points, which required a ton of selling. Another week like this past one and it will be time to start increasing equity allocation's back up. Stuck a toe in today by selling some 30 year bonds that are up 37% and bought a small amount of equities.

AA is about risk management, in my view. Fixed AA don't do enough in this regard (also in my view).

 

[TromboneAl]

A problem with rebalancing when things get out of whack is that you might be too scared to look at your portfolio.

 

[TromboneAl]

Obviously mutual fund transactions take time, so that would make little to no sense on a practical level during a week like this one, when rebalancing would have been justified on Monday but not on Tuesday, etc.

Can't you solve that by doing your rebalancing at the of the trading day?

 

[W2R]

Can't you solve that by doing your rebalancing at the of the trading day?

I'll defer to Vanguard on that one... here are the rules

Your Vanguard® fund exchange will be processed using the closing share price on the business day on which Vanguard receives your request. Requests received after the close of the New York Stock Exchange (usually 4 p.m., Eastern time) will be processed using the next business day's closing price.

 

[devans0]

I have read that Two years was more optimal than one for rebalancing. The rational was that re-balancing too often never let you buy in at a deep low, or sell you out before a nice peak. If memory serves, L Swedroe wrote of this. He also suggested rebalancing at 10% or greater. Again, too often just churns without reaping the benefits.

 

[ERD50]

I'll defer to Vanguard on that one... here are the rules

I think what T-Al is saying is, you can enter the trade 10 minutes before market close, and it will be transacted at the closing price that day. If you assume the market isn't going to move all that much in the last few minutes, it is a way to act on the days movement.

I've done it before.

Turn this around:

Requests received after the close of the New York Stock Exchange (usually 4 p.m., Eastern time) will be processed using the next business day's closing price.

to: (re-phrasing) -

Requests received BEFORE the close of the New York Stock Exchange (usually 4 p.m., Eastern time) will be processed using THAT business day's closing price.

-ERD50

 

[easysurfer]

I have read that Two years was more optimal than one for rebalancing. The rational was that re-balancing too often never let you buy in at a deep low, or sell you out before a nice peak. If memory serves, L Swedroe wrote of this. He also suggested rebalancing at 10% or greater. Again, too often just churns without reaping the benefits.

Perhaps two year intervals are better. But I'd prefer to just do so once a year because it's easier to remember, without having to think, "Did I rebalance last year already or not?"

On using a two year interval to try to buy at a deep low, or sell at a nice peak...begs the question..how do you know you are at a low or peak? Trying wait for those conditions..hmmm...wouldn't that seem like..um. Market Timing?

 

[devans0]

You would not know if you are at a peak or trough with a two year look, just whether you were out of balance enough to bother to rebalance.

I often wondered about the time of year to rebalance. Fiscal quarters force a lot of movement from the active funds as they try to get the sexy starlet stock into their portfolio and bail on the dogs before it's time to print the prospectus'. That churn is an indexers opportunity.

Besides, all that rebalancing every year is too much like w@i^K.

 

[pb4uski]

I think what T-Al is saying is, you can enter the trade 10 minutes before market close, and it will be transacted at the closing price that day. If you assume the market isn't going to move all that much in the last few minutes, it is a way to act on the days movement......

-ERD50

That is what I did on Monday. I used the change in the Vanguard Total Stock and Total Bond ETFs from opening to 3;45 pm to estimate the change in the Vanguard Total Stock and Total Bond funds for the day and used those estimates to determine the amount of my trade to get back to 60/40. Then submitted my trade at 3:50 pm. Worked like a charm.

 

[W2R]

That is what I did on Monday. I used the change in the Vanguard Total Stock and Total Bond ETFs from opening to 3;45 pm to estimate the change in the Vanguard Total Stock and Total Bond funds for the day and used those estimates to determine the amount of my trade to get back to 60/40. Then submitted my trade at 3:50 pm. Worked like a charm.

Yes, that's what the quote from Vanguard says (quite clearly, I thought, so kudos to Vanguard). I have done that in the past as well.

It's this thing about being retired... we spend the afternoons together. As you might expect, the two of us often seem to find ourselves otherwise occupied in more pleasurable pursuits instead of following the market like a hawk and rebalancing.

 

[arebelspy]

Perhaps two year intervals are better. But I'd prefer to just do so once a year because it's easier to remember, without having to think, "Did I rebalance last year already or not?"

The easiest thing I find when doing something infrequently like that is set a rule, so I don't have to remember.

I.e. Rebalance in even numbered years.

Another example: Leap years. Ask yourself hmm, was 2006 a leap year? Will 2022 be? Leap years are easy to remember because they coincide with presidential elections. Much easier (for me) to remember Bush got elected in 00 and 04 and Obama in 08, and the next election is 2012 than remember which year was a leap year. (If you don't follow politics much and couldn't tell when the next presidential election was, find a rule that works for you).

But remembering stuff becomes a lot easier with rules and tricks.

 

[Alan]

I have read that Two years was more optimal than one for rebalancing. The rational was that re-balancing too often never let you buy in at a deep low, or sell you out before a nice peak. If memory serves, L Swedroe wrote of this. He also suggested rebalancing at 10% or greater. Again, too often just churns without reaping the benefits.

Otah (Unvealing the Retirement Myth) recommends that, historically, every 4 years at the end of a presidential election year gives the best results.

Having said that, up to now I have been re-balancing every year or when I get out of balance by 5%. But now that most of our funds are in target retirement accounts the re-balancing is handled for me.

 

[easysurfer]

The easiest thing I find when doing something infrequently like that is set a rule, so I don't have to remember.

I.e. Rebalance in even numbered years.

Another example: Leap years. Ask yourself hmm, was 2006 a leap year? Will 2022 be? Leap years are easy to remember because they coincide with presidential elections. Much easier (for me) to remember Bush got elected in 00 and 04 and Obama in 08, and the next election is 2012 than remember which year was a leap year. (If you don't follow politics much and couldn't tell when the next presidential election was, find a rule that works for you).

But remembering stuff becomes a lot easier with rules and tricks.

That's a good idea, about setting up the rules, such as the even numbered years for example.

I do the same for leap year (knowing that it's same as presidential elections).

 

[Safe Harbour]

I thought the idea of rebalancing was to force you to buy low and sell high. The opposite of most people's instincts (including mine) and therefore in need of an enforce mechanism. That is why I use an approximate annual rebalance, but if there is a huge swing like this week or where we sat on the high side in early July, I also rebalance. This amplifies the buy low - sell high nature. I don't need a back test to know this is better. The magnitude of the improvement is dependent on the size of the swings and the faithfulness of following through. If you just rebalance annually you may not have much too do as your AA maybe fine, but then you aren't buying low and selling high. Now I don't fret about hitting the top and bottom. I don't believe that is possible. But I know when the market is "down" (now) and when it is high (July). I can also look at my AA to know when I have more equities than I should or more fixed income than I should (vs. my AA). As long as you are not generating short term gains go for it on the swings! As I figure the numbers if you rebalance a 50% AA on a 20% drop (note this costs you 20% of your fixed income!) you get a 2.5% extra gain, when the market has recovered minus what you would have gotten in the fixed income, but plus dividends which should more than offset the fix income loss. So the gains are not huge but the are worth claiming IMHO, especially sine the program trading of big investors is causing these swings to flush out nervous money as profits for them. Why not ride the waves?

 

[ejman]

I use a wide 10% band for formal rebalancing (the current band is 50 to 60% equities) and hardly ever actually get to do it. There is some minor ongoing rebalancing as I sell my anticipated living expenses for next year if equities have had a positive year and draw form cash balances if not but typically this is a minor 1 - 2% (I take all taxable account distributions in cash). I was almost ready to rebalance at the prior peak in late April/early May but the market has rebalanced my allocation to about 56% on its own.

A related question/concern is that I've thinking of ratcheting down my equities allocation to the 45 -55% range as I'm now almost 61 and conceptually I would like to get to a long term 50/50 and remain there ( within the wide bands mentioned above)

From a gut instinct level, I would like to rebalance when equities are high but from some of the comments here, I get the impression that it really doesn't matter much.

So my options are:

1) do nothing, let the market do the rebalancing (currently just above the upper range of where I want to be)

2) Rebalance now

3) wait for the current excitement to pass before taking action

Thoughts? suggestions?

 

[easysurfer]

For me, I've decided to just rebalance annually (in early January when I do all my other stuff -- like determining how much to withdraw each month from my MMF to checking, etc.)

The way I figure, who knows how many more major up/down swings the market will have until then end of the year.

Otherwise, wouldn't I be making too much work for myself?

I guess a comparison is do I check my email every hour in a day or wait until the end of the day to check all of them? Either way, I'll be pretty much accomplishing same thing...picking up my emails..

Just a matter of preference, it seems.

 

[KingB]

For me, I've decided to just rebalance annually (in early January when I do all my other stuff -- like determining how much to withdraw each month from my MMF to checking, etc.)

I noticed that there are some that rebalances in early January. Will this not cause a lot of of equities being sold or bought (depending on the previous year's performance)?

I think it is better to schedule the rebalancing on your birthday or any other significant date (anniversary, etc).

 

[easysurfer]

I noticed that there are some that rebalances in early January. Will this not cause a lot of of equities being sold or bought (depending on the previous year's performance)?

I think it is better to schedule the rebalancing on your birthday or any other significant date (anniversary, etc).

I try to do the majority of the rebalancing within retirement accounts to not have a tax impact.

Though, on a good previous year, I might have some gains outside of retirement accounts to replenish my emergency cash fund for the upcoming year.

 

[REWahoo]

No need to rebalance - ever, if you put everything in the new Vanguard Tuesday & Thursday Fund (VTUTH). It is an S&P 500 index fund on Tuesdays and Thursdays and a money market fund on Mondays, Wednesdays an Fridays.

The fund strategy was back tested against this weeks market performance and it looks to be a strong performer.

 

[Alan]

No need to rebalance - ever, if you put everything in the new Vanguard Tuesday & Thursday Fund (VTUTH). It is an S&P 500 index fund on Tuesdays and Thursdays and a money market fund on Mondays, Wednesdays an Fridays.

The fund strategy was back tested against this weeks market performance and it looks to be a strong performer.

And on weekends it bets on the PA State lottery.