Effective Rebalancing Every Few Years!

[Midpack]

It seems most rebalancing frequency threads argue for annually or (much) more often. So another take.

I only look at my holdings and AA quarterly and I have said that many times. What I haven't said outright is I've only rebalanced every few years for many years, and where possible I've used tax loss harvesting-offsetting gains/losses or other buys without selling - versus straight sell X and buy Y. And I use the 5/25 rule when I do rebalance, so I've never done minor tweaks.

Caveat: In sheltered accounts it doesn't matter much.

I was rereading The Investor's Manifesto (William Bernstein) a few days ago, and stumbled across this:

Before approaching the question of how to rebalance, we have to confront the elephant in the rebalancing room: taxes. Investors rebalance portfolios for two reasons: to enhance return and to reduce risk. The excess returns generated by rebalancing are not large, usually no greater than 1 percent per year, which is much smaller than the capital gains taxes you will realize on most sales. So purely from a returns point of view, you should never sell stocks to rebalance inside a taxable portfolio. Buying is fine of course, and you can use fund distributions - the capital gains, dividends, and interest the funds throw off - to rebalance as well.

Having discussed the problems that rebalancing can create with taxes, just how, and how often, should you rebalance? The answer is relatively infrequently. It turns out that stock and asset class price changes are not perfectly random. Over periods of a year or less, prices do tend to "trend" a bit: If a given asset class had better than average performance last month, there is a slightly better than average chance it will also next month; the same is true of less than average performance as well.

Over periods of more than a year, the opposite occurs. Prices tend to "mean revert": An asset class with an above average past return will tend, ever so slightly, to have a below average future return, and vice versa. In sheltered accounts, the optimal strategy would seem to be let the losses and gains runs for two to three years, then rebalance. So an effective rebalancing interval would seem to be "every few years."

 

[OldShooter]

+1

IIRC the robos, Wealthfront and Betterment only advertise/claim 50bps or less as the benefit of rebalancing. Bernstein's point about momentum is interesting too.

 

[davebarnes]

I cannot get excited about rebalancing.
For us: January 2020 was 72% stock indices. With the recent downturn, April is 68% stock indices.

 

[eroscott]

It seems most rebalancing frequency threads argue for annually or (much) more often. So another take.

I only look at my holdings and AA quarterly and I have said that many times. What I haven't said outright is I've only rebalanced every few years for many years, and where possible I've used tax loss harvesting-offsetting gains/losses or other buys without selling - versus straight sell X and buy Y. And I use the 5/25 rule when I do rebalance, so I've never done minor tweaks.

Caveat: In sheltered accounts it doesn't matter much.

I was rereading The Investor's Manifesto (William Bernstein) a few days ago, and stumbled across this:

The key seems to be a decent difference between the percentage of stocks and bonds.

A financial advisor I follow indicated that the math shows it worked out. I expanded on his example using a basic spreadsheet to show the ending values of rebalancing (green) or not rebalancing (blue):

 

[Montecfo]

Since I am an active investor with 75% of nestegg tax deferred, I have found it rather easy to maintain my AA. I would certainly never incur taxes to rebalance.

But I am curious, do some folks do that (pay large tax bills to rebalance)?

 

[Which Roger]

Since I am an active investor with 75% of nestegg tax deferred, I have found it rather easy to maintain my AA. I would certainly never incur taxes to rebalance.

But I am curious, do some folks do that (pay large tax bills to rebalance)?

Same here. Based on a poll a few months ago here, it seems that the majority have enough in tax-deferred to do all rebalancing there. Since I have moved from stocks to bonds more frequently than the opposite, my tax-deferred is heavy on bonds and taxable is heavy on stocks, but that's not necessarily a bad thing in my situation.


Also, many are managing income to stay within the bracket where CGs are tax-free, so rebalancing from taxable is feasible for them without taking a tax hit.

 

[SnowballCamper]

Some thoughts:

If you don’t rebalance, then there is not much point in having an asset allocation. By default everyone with investments has an asset allocation, but if you don’t deliberately choose it, you’re just speculating.

The empirical data tells us that momentum is a real thing, so probably less often is better than more often. Personally, I use a band criteria, and as a result rebalance more than what is numerically optimal.

But the whole point of AA is to manage risk, the risk that I’ll sell low and end up buying high later on (or miss future gains altogether). So when the market drops and I feel like I should do something, I rebalance. And the beauty of this is that rebalance means to buy low and sell high (or flat).

It’s beautiful when the prudent thing to do is simple enough that anyone can do it.