livesoft wrote:I expect a bonus of between 1% and 2%. I do not rebalance based on the calendar nor do I use 5% to 10%. Instead, I use the RBD method which seems to work extremely well.
grayfox wrote:One of the reasons I created this poll was that I saw this old thread Opportunistic Rebalancing: A New Paradigm from 2008 had been revived
Now if you study Modern Finance in university, one of the results is that return of a portfolio is equal to the weighted sum of the returns of the components.
Rp = w1*R1 + w1*R2 + w3*R3 + ... wn*Rn
As far as I have seen up to this point, balancing return is not part of the modern finance theory. They don't add in rebalancing bonus to Rp. When you solve for the efficient frontier (EF), the highest returning portfolio is 100% of the highest returning asset. The lowest returning portfolio is 100% of the lowest returning asset.
There can be portfolios on the EF that have lower volatility than the least volatile asset. This seemingly magical result is from uncorrelated assets. But there are no portfolios on the efficient frontier that have higher return than the highest return asset.
That's why I would call the rebalancing return profit & loss from trading.
Random Walker wrote: The compounded return of the portfolio is always less than the weighted average annual return of the components due to portfolio volatility.
Dave
Dale_G wrote:I have run the numbers on the effect of rebalancing my accounts from 2002 through mid 2012. It can be a bit tedious accounting for dividends, but I am quite confident of the numbers. The rebalancing benefit averaged about 0.73% of the portfolio value per year based on round trip transactions. My asset allocation was 50/50 and I maintained fairly tight rebalancing bands.
Random Walker wrote:GrayFox,
I have not taken any university level finance classes. But based on my reading of Boglehead books, I think I disagree with what you posited. The return of a portfolio cannot simply be the weighted average return of the components. The compounded return of the portfolio is always less than the weighted average annual return of the components due to portfolio volatility. In fact, the more you can dampen portfolio volatility through investing in multiple asset classes, the closer the compounded return will be to the average annual return of the components. The positive effect of dampened portfolio volatility on annualized (compounded) returns is what I would view as the rebalancing bonus.
The potential benefit of adding an asset class to a portfolio depends on more than its return. It depends on expected return, correlation to other portfolio components, volatility. Curious to hear your thoughts.
Dave
Dale_G wrote:I have run the numbers on the effect of rebalancing my accounts from 2002 through mid 2012. It can be a bit tedious accounting for dividends, but I am quite confident of the numbers. The rebalancing benefit averaged about 0.73% of the portfolio value per year based on round trip transactions. My asset allocation was 50/50 and I maintained fairly tight rebalancing bands.
It was not much fun rebalancing into the decline of 2008/2009, but the "bonus" eventually realized made up for some of the discomfort.
Volatility can be your friend, but only if you rebalance.
Dale
Random Musings wrote:Equities, in the long-run, have outperformed bonds, and the expectations are that they will continue to do so. Hence, on average, you are rebalancing more often from equities to bonds which should diminish returns.
However, if one looks at it from a set allocation point (say 50-50 target), it's not the "rebalancing bonus" that is the driver, IMHO. It's more about sticking with your portfolio need of risk in your written investment plan.
RM
Random Walker wrote:I'm not really buying what I'm reading here. I certainly could be wrong. But it seems to me that the return of a REBALANCED portfolio cannot simply be the weighted average of the individual components.
Dave
Aptenodytes wrote:Rebalancing, for me, is a risk management strategy, not an optimization strategy. If I don't rebalance my risk exposure gets off. So the more relevant question for me, not necessarily everyone, is how much lower is the probability of a catastrophic loss if I rebalance? I see that benefit as very large.
I realize risk and return are two blades of the same scissors, but when I rebalance I am thinking risk more than return. Seems at a minimum you'd want to look at the return bonus and the risk benefit, not just one.
In any event the counterfactual is a bit bizarre. Having chosen an AA why wouldn't you rebalance to maintain it?
So the poll is to see how many here believe that they can get a re-balancing bonus by timing their re-balancing moves.
Random Walker wrote:Gray fox,
Thanks for the comments. I'm sure I'm going to learn something from this. But I'm still disagreeing. The equation you post is the expected return ex ante of a portfolio comprised of individual components. It does not account for potential affects of internal rebalancing. I agree that if you start at time point 1 and finish at time point 2, then the portfolio return of a portfolio with no additions/subtractions and no rebalancing will be the weighted average of the components.
But I believe portfolio volatility will have a huge effect on compounded annualized returns and that volatility will be dampened by multi asset class investing. So I guess what I'm saying is the following. Multi asset class investing will dampen portfolio volatility and bring compounded return closer to average annual return. Rebalancing will maintain the risk profile and can have positive or negative effect on returns depending on the course of market, momentum, reversion to mean. Ok now decipher this and straighten me out. Thanks.
Dave
umfundi wrote:So the poll is to see how many here believe that they can get a re-balancing bonus by timing their re-balancing moves.
If they're that smart, why don't they unbalance?
Keith
Matigas wrote:"Rebalancing equals noise."
John Bogle
... of the limited methods that the paper looked at.grayfox wrote:...
3. The often-recommended annual rebalance with 0% bands does not look like the best method. The paper shows 20% bands with look-interval of 1 day to 2 weeks was best. ...
grayfox wrote:This paper from 2008 that was posted on another thread has the best information I've seen on rebalancing
Opportunistic Rebalancing
A couple of points:
1. Observe that some periods had negative rebal-return and some periods had positive rebal-return. Periods with trending markets had negative rebal-return; periods with reversals, had positive rebal-return. Rebalancing can add to return or subtract from return, depending on the market conditions, i.e. trending or mean-reverting.
2. The amount of rebal-return varied with the rebalancing algorithm. It must also vary with the portfolio asset allocation, as well. The paper only looked at one asset allocation, 60/40 stock/bonds.
3. The often-recommended annual rebalance with 0% bands does not look like the best method. The paper shows 20% bands with look-interval of 1 day to 2 weeks was best.
Return to Investing - Theory, News & General
Users browsing this forum: FAST Enterprise [Crawler], Google [Bot], Ki_poorrichard, LateStarter1975, LeeMKE, Peterjens and 56 guests