Daily Rebalancing vs. Expenses

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Daily Rebalancing vs. Expenses

Postby assumer » Fri May 03, 2013 11:55 am

How do you determine the value in daily rebalancing? I am asking about the vanguard target retirement funds, specifically. They rebalance daily, yet have higher expense ratios than underlying admiral shares. So if you are not going to rebalance daily, but rather weekly or monthly, if you were to hold the individual shares, how do you determine if it's worth the slightly decreased expense ratio? At what point might it be worth it?
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Re: Daily Rebalancing vs. Expenses

Postby The Wizard » Fri May 03, 2013 12:04 pm

Not sure what the answer to your Q is, but holding equivalent funds with lower ER would seem to win.

Even though luminaries such as Larry say that daily rebalancing is optimal, for most of us, it hardly matters.
Rebalancing monthly should be fine for most folks for containing risk.
Current accumulators might even be able to redirect their new contribs and maintain their AA that way...
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Re: Daily Rebalancing vs. Expenses

Postby assumer » Fri May 03, 2013 12:29 pm

The Wizard wrote:Even though luminaries such as Larry say that daily rebalancing is optimal, for most of us, it hardly matters.


Are there charts online comparing different rebalancing frequencies? A quick google search turned up Figure 6 in this paper: https://personal.vanguard.com/pdf/icrpr.pdf which is the best I can find.
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Re: Daily Rebalancing vs. Expenses

Postby kenyan » Fri May 03, 2013 12:41 pm

It depends upon what your goal is with rebalancing. If it is to maintain a risk profile, then daily would be best. Beyond that, it's really just personal preference; the real effect on your portfolio will be small if you do it once a month.

Consider this - if your equities have a bad month, down 10%, and your bonds go up 2% in the meantime, how much will that change a 70/30 asset allocation?

Assuming a total portfolio of 100k at the beginning of the month, you have 63k/30.6k at the end of the month, or an asset allocation of 67.3/32.7. Is the risk profile of 67.3/32.7 significantly different than 70/30? I submit that it isn't, and that your daily rebalancing didn't change a whole lot. If you continued to invest with your original asset allocation during the month, your deviation would be even lower.

Now, there is another possibility - though it is a controversial one - on a potential "rebalancing bonus." This is an attempt to capitalize on "reversion to the mean," in which specifically set or timed rebalancing triggers will force you to buy low/sell high, or so you hope. There are studies on this, which suggested that - in the past - triggers set around 15-20% relative for each asset class, checked with a certain frequency, maximized the rebalancing bonus. No guarantee that this will be most efficient in the future.
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Re: Daily Rebalancing vs. Expenses

Postby Default User BR » Fri May 03, 2013 4:38 pm

kenyan wrote:It depends upon what your goal is with rebalancing. If it is to maintain a risk profile, then daily would be best. Beyond that, it's really just personal preference; the real effect on your portfolio will be small if you do it once a month.

Right. Before you can measure something, you have to define what you're measuring and against which scale. "Value" is too vague.

Many of us use rebalancing ranges rather than a specific frequency. I haven't really rebalanced in years, although I direct new money into lagging asset classes. That's a form of rebalancing. My 401(k) contributions have been 100% fixed-income for a few years now, just to keep up with stocks.


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Re: Daily Rebalancing vs. Expenses

Postby livesoft » Fri May 03, 2013 4:58 pm

I wonder if the premise is correct. I doubt Vanguard Target Retirement funds do daily rebalancing beyond what contributions and redemptions provide for.

That is, the funds may have a target of 30.15% fixed income for that week or day, but would they actually at the end-of-day have worked their trades to have 30.15% fixed income? Or would a fixed income allocation of anywhere between 29.5% and 30.65% be OK for them?

So I think they do not have daily rebalancing and they have higher expenses.
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