Rebalancing only stocks/bonds but not US/international?

[harikaried]

I've been thinking about simplifying our portfolio, and looking over the discussions on US/intl split, it seems like there's a wide variety of weightings that people like. One way to look at it is that the actual weighting doesn't really matter that much. So I wonder how well the following works:

1) determine bond allocation and put that in tax advantaged
2) fill the rest of tax advantaged with US stocks
3) fill up taxable with international stocks

Then to rebalance, shift between bonds and US stocks in the tax advantaged account as necessary. Don't bother with selling/buying international other than when taking/putting money for the taxable.

[harikaried]

I just came across another post that seemed to have a similar idea:

- have very loose rebalancing bands for stocks
- have relatively tight bands for bonds

So as the market fluctuates and as you put/take money, the first priority is making sure you're at the right amount of risk by buying/selling bonds to AA. Then don't worry too much about US/intl split. If you want to be tax efficient with international, just make sure that it's in the taxable.

[Dogs]

There is a wide range of acceptable US/Int allocations, but whatever you pick, you should stick with it and rebalance as necessary.

By letting your allocation vary you are losing all the possible sell-high and buy-low profits, even if you maintain the right risk tolerance by messing with your bonds.

I guess this would save you a minimal amount of time, but you might as well just go with a target retirement fund if simplification is your top priority.

[Aptenodytes]

I think you are looking for a free lunch. No matter how loose you make the international rebalance bands, you need some bands or you are playing with fire. At some point you have to allow for the possibility that the bands will be broached.

The logic of using wider bands seems fine, but better to be explicit on what the bands actually are rather than just hope you'll always stay within them, whatever they might be.

In other words, there's surely a point beyond which you would want to rebalance in spite of the tax implications or other hassles. Decide what that point is and let that define your new bands.

[momar]

You could just hold global market cap and not worry about it.

[tc101]

1) determine bond allocation and put that in tax advantaged
2) fill the rest of tax advantaged with US stocks
3) fill up taxable with international stocks

and

If you want to be tax efficient with international, just make sure that it's in the taxable.

What is the reason for keeping internatonal in taxable? Why is that better than US stocks in taxable?

[pascalwager]

You can exploit the foreign tax credit in taxable, but not in tax-deferred or tax-free. Then, if you have room left over, total US market is fine in taxable.

[YDNAL]

I've been thinking about simplifying our portfolio, and looking over the discussions on US/intl split,.....

Then to rebalance, shift between bonds and US stocks in the tax advantaged account as necessary. Don't bother with selling/buying international other than when taking/putting money for the taxable.

There is hiarchy in rebalancing, for certain IMO.
1. Equity/Fixed split to maintain overall portfolio riskier/less riskier (and expected return) profile.
2. Other splits.

"Simplifying the portfolio" should not dictate how you maintain #2. You can easily leave money on the table. For instance, International Stocks take-off in any given period while Domestic Stocks get a beat-down. I would make sure to sell HIGH in order to buy LOW, and my intended split is the best guideline to tell me what to do.

[harikaried]

There is hiarchy in rebalancing, for certain IMO.
1. Equity/Fixed split to maintain overall portfolio riskier/less riskier (and expected return) profile.
2. Other splits.

It seems like there's two different benefits of rebalancing here for the two steps you've described. For the former, rebalancing is primarily used to return to the correct amount of risk, and for the latter, rebalancing is mostly to "lock in gains," i.e., buy-low/sell-high.

[retiredjg]

1) determine bond allocation and put that in tax advantaged
2) fill the rest of tax advantaged with US stocks
3) fill up taxable with international stocks

I can see several scenarios in which this would work just fine.

If this approach benefits you in some way, and the changes are moderate, I don't see a big problem with it. For example, if your international target is 30% of stocks and you are happy with 5% bands, it takes a pretty big change to get below 25% of stocks or above 35% of stocks anyway. So the approach you propose might not be any different from just "normal" rebalancing.

On the other hand, if you see your international as a fixed percentage of your portfolio rather than as a number that moves with the percentage of stocks, that's a little less flexible and you may be outside your bands more often if you follow the approach you propose. Or I suppose you could have wider bands.

So some of this just boils down to how you feel about what makes your portfolio "out of whack". If it isn't out of whack, it doesn't need to be rebalanced.


People see the purpose of rebalancing in different ways. I think everyone agrees that rebalancing serves to keep your portfolio at the risk level you want. In addition, some people see rebalancing as a way to sell your winners and buy losers, therefore increasing yield. I'm not sure if this second idea is a theory or if it is something that has been proven to increase yield. But if you maintain the balance of your portfolio using new money, its a moot point.

[YDNAL]

People see the purpose of rebalancing in different ways. I think everyone agrees that rebalancing serves to keep your portfolio at the risk level you want. In addition, some people see rebalancing as a way to sell your winners and buy losers, therefore increasing yield. I'm not sure if this second idea is a theory or if it is something that has been proven to increase yield. But if you maintain the balance of your portfolio using new money, its a moot point.

JG,

Assets Classes, regions of the World, etc. can move in vastly different directions. I wouldn't categorize anything a "moot point" because "old money" can be exposed to unrealistic pricing - a la 1999-2000 when the S&P 500 P/E reached 45 (or something like that). This certainly has a much greater impact on accumulators towards the end of accumulation (larger Assets, typically) than to those near the beginning of accumulation.

Thanks for bumping the thread because I hadn't realized the OP posted.

There is hiarchy in rebalancing, for certain IMO.
1. Equity/Fixed split to maintain overall portfolio riskier/less riskier (and expected return) profile.
2. Other splits.

It seems like there's two different benefits of rebalancing here for the two steps you've described. For the former, rebalancing is primarily used to return to the correct amount of risk, and for the latter, rebalancing is mostly to "lock in gains," i.e., buy-low/sell-high.

Sure, harikaried, as I just wrote above, those nearing the end of accumulation should be most concerned with controlling #1. At the same time, be well aware of #2.

[retiredjg]

Assets Classes, regions of the World, etc. can move in vastly different directions. I wouldn't categorize anything a "moot point" because "old money" can be exposed to unrealistic pricing - a la 1999-2000 when the S&P 500 P/E reached 45 (or something like that). This certainly has a much greater impact on accumulators towards the end of accumulation (larger Assets, typically) than to those near the beginning of accumulation.

That's not really what I was talking about.

If you are using your new money to maintain balance, you aren't rebalancing by "selling high and buying low" within what you already own (or much anyway). So it does not matter if "selling high and buying low" produces more yield or not, because you aren't doing it.

That's what I meant becomes a moot point - whether rebalancing actually produces a financial bonus or not.

[YDNAL]

Assets Classes, regions of the World, etc. can move in vastly different directions. I wouldn't categorize anything a "moot point" because "old money" can be exposed to unrealistic pricing - a la 1999-2000 when the S&P 500 P/E reached 45 (or something like that). This certainly has a much greater impact on accumulators towards the end of accumulation (larger Assets, typically) than to those near the beginning of accumulation.

That's not really what I was talking about.

If you are using your new money to maintain balance, you aren't rebalancing by "selling high and buying low" within what you already own (or much anyway). So it does not matter if "selling high and buying low" produces more yield or not, because you aren't doing it.

That's what I meant becomes a moot point - whether rebalancing actually produces a financial bonus or not.

Here we go again...

First, I said one should "rebalance" if an Asset Class, Region of the World, etc. has become unrealistically priced based on historical norms.

Second, larger portfolios would require years and years to rebalance ONLY with new money during, for instance, a market bubble - like during Dot.Com hysteria that I cited in my post.

Third, so if "your aren't doing it" - rebalancing the old money, that is - you are letting your overall risk/return profile get out-of-whack.

Gotta run!

[retiredjg]

Here we go again...

No we aren't. I'm not going there.

I agree with everything you said, it just isn't related to what I was talking about.

No big deal. You and I just don't speak the same language and I doubt we ever will. Misunderstandings are common and trying to fix it with more language can be counterproductive. So, no, there's not going to be any "here we go again....". Not this time, anyway.