Jack Bogle says rebalancing is overhyped?!

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Phineas J. Whoopee
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Phineas J. Whoopee »

stemikger wrote:...
I may be way off, but it seems bonds are becoming more riskier then they used to be and I believe that is a problem when rebalancing into them. Many experts I trust have been very vocal on how bonds are turning into a very risky investment. One of them said it's like bending down before a steamroller to pick up a nickel.
Which one? When? Where? And why should we believe in that person's credibility?

I can use vivid similes to support any position you'd like. Most of the time I don't even have to make them up. I can copy from others. Just like your "one of them" did. For example: Chopping down trees is like murdering nearly all of one's community, because of what happened on Easter Island. And planting trees is like helping to perfect the world. If you're planting a tree and you hear [ Moshiach | the Buddha ] has come, first finish planting, then go to greet him (or her).

Duration says as long as your bond choices are reasonable for your situation they are not risky.

"I'm in for the duration" said the prisoner of war.
"As long as I'm assigned here rather than the front, I'm indifferent to your situation" said the military guard.

See how easy it is?

PJW
Last edited by Phineas J. Whoopee on Sun Oct 13, 2013 6:25 pm, edited 2 times in total.
Browser
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

I guess people just can't get beyond seeing risk in terms of the short run. But, even then, they contradict themselves in justifying rebalancing. On the one hand, rebalancing out of stocks is good because it thereby lessens the amount that you can lose in the short run if stocks go down. On the other hand, rebalancing into stocks is good because it thereby increases the amount that you can win in the long run if stocks go up. Cake is good when you can have it and eat it too.
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Electron
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Electron »

Rebalancing can affect the best choice for Asset Location. Many investors place Equities in taxable accounts and Bonds and REITs in sheltered accounts.

Too much rebalancing out of equities in a taxable account can actually negate the relative tax benefit over time. I have been modeling a few scenarios in a spreadsheet and both dividends and capital gains impact the benefit of holding equities in a taxable account. It is best to minimize capital gains and not have a high dividend yield.

There are cases where you are actually better off with equities in a sheltered account in combination with bonds and/or REITs in a taxable account. One reason is that higher returns give an added benefit when one can defer taxes for a long period of time.

There are many variables so you really have to look at your specific case. Note also that the 0% bracket for dividends and capital gains adds significant benefit if one qualifies and holds equities in a taxable account. On the other hand, we don't know if that bracket will always be there. It is also possible to have only a portion of dividends and capital gains in the 0% bracket.

As already mentioned, dividends alone can be considered for rebalancing if equities are placed in a taxable account. Note also that there can be a small or modest penalty over time for holding a value index or value fund that pays higher dividends.
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Phineas J. Whoopee
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Phineas J. Whoopee »

Browser wrote:I guess people just can't get beyond seeing risk in terms of the short run. But, even then, they contradict themselves in justifying rebalancing. On the one hand, rebalancing out of stocks is good because it thereby lessens the amount that you can lose in the short run if stocks go down. On the other hand, rebalancing into stocks is good because it thereby increases the amount that you can win in the long run if stocks go up. Cake is good when you can have it and eat it too.
That isn't right.

It isn't even wrong.

Today there are two well-developed strategies for meeting one's expenses over the long term. You're criticizing one: diversification. You're speaking as if diversification can't work as a strategy. You're speaking as if the only possible strategy is liability matching.

Liability matching is a perfectly fine strategy. It's probably harder to achieve; but once achieved it's more certain.

Worst of all, as dbr already wrote, you're taking one small snippet of words Jack Bogle produced at one time at one place for one purpose, and using it as though it encompasses all situations for all people all the time everywhere.

If you want to buy stocks and bonds and only ever rebalance when bonds are down and stocks are up, you're perfectly free to do so. Some Bogleheads have endorsed such an approach. If you want to say that's the only possible strategy and it's best for all people all the time in every situation and everywhere, well, I'd prefer not to express myself further.

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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

Facts remain facts. Despite the hoopla, studies on rebalancing show relatively small effects on portfolio volatility and indicate that returns are positively as well as negatively impacted over different timeframes.

For example, an unrebalanced 50/50 mix of Total Stock Market and Total Bond Market had a compounded growth that virtually matched an annually rebalanced 50/50 portfolio over the 30-year period from 1972-2001, with about 10% higher average annual volatility. The worst annual drawdowns were nearly the same over that period.

By the end of 2012, the balanced portfolio had an annualized compound growth of 9.1% vs. 9.0% for the unrebalanced portfolio with about 10% lower annualized portfolio volatility. The largest differences in returns occurred during the tech bubble runup and pop, in which the unrebalanced portfolio achieved an advantage over the balanced portfolio and then gave it back following 2000. The unrebalanced portfolio experienced a drawdown in 2002 of about 22% from the peak in 1999 vs. a drawdown of about 8% for the rebalanced portfolio. This is largely explained by the fact that by the end of 2001, the stock allocation for the unrebalanced portfolio had increased to 70% from the initial 50%.

The worst drawdown for the unrebalanced portfolio actually occurred at the end of the second bubble in 2008, when it lost about 25%, compared to about 17% for the rebalanced portfolio. At that time the stock allocation had increased to nearly 75% from the initial 50% allocation in 1972.

What can be concluded is that, over the long run, the returns from rebalancing are not likely to surpass the returns from never rebalancing at all - at least in the case of the 50/50 portfolio. However, there is a risk of larger drawdowns percentage-wise that can result from equity bubbles in which the stock allocation is allowed to grow relatively large. Mechanical rebalancing, such as annually, isn't necessary to address this, however. If the investor had adjusted his allocation appropriately during equity runups, he could have minimized sleep-disturbing drawdowns. Anyone who got too greedy and allowed his stock allocation to balloon prior to the pops in 2000 or 2008 pretty much got what they deserved. Even so, it's noteworthy that returns weren't severely impacted by those drawdowns, as disturbing as they might have been, because they were preceded by large runups in portfolio value.

The advantages of mechanical rebalacing are exclusively behavioral. If it helps an investor sleep better because he mistakenly believes it makes a difference to his long-term returns and also smooths his portfolio returns by a fraction, then by all means go for it. But it would seem to be quite adequate for most of us just to keep track of our policy allocation to equities and make adjustments when the next major stock bubble occurs.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Clive »

For example, an unrebalanced 50/50 mix of Total Stock Market and Total Bond Market had a compounded growth that virtually matched an annually rebalanced 50/50 portfolio over the 30-year period from 1972-2001

..The unrebalanced portfolio experienced a drawdown in 2002 of about 22% from the peak in 1999 vs. a drawdown of about 8% for the rebalanced portfolio. This is largely explained by the fact that by the end of 2001, the stock allocation for the unrebalanced portfolio had increased to 70% from the initial 50%.
So if the non rebalanced started at 50% stocks, ended (the test period) at 70% stocks, it generally averaged a 60/40 overall and comparing that to 50/50 sees generally similar results
But it would seem to be quite adequate for most of us just to keep track of our policy allocation to equities and make adjustments when the next major stock bubble occurs.
Rebalancing is timing. If the prior trend continues after having rebalanced then not having rebalanced would have been better. If the prior trend subsequently reverses - then having rebalanced was better.

So is not rebalancing safer? Rather than 50/50 rebalanced, if I'm investing for 20 years and anticipate that an initial 40/60 non rebalanced will end up at 60/40 (average 50/50 overall), then if I'm right - OK, if better than expected and ends at 70/30 - great. If worse than expected then my maximum risk is 40%. In contrast 50-50 rebalanced could repeatedly add more into a decline, perhaps to only see further declines and might collectively have injected 70% or more into the loser.

A synthetic call option starts with a little stock and adds more as the price rises, reduces as the price declines. Non rebalanced is more akin to buying a call option whilst rebalancing (reducing as price rises) is more akin to selling a call option. Generally buyers of call options lose a little often, but make a lot less frequently. Sellers of call options make a little often, but lose a lot less frequently. The Permanent Portfolio's management of gold is a prime example. Its 25% initial gold allocation could be repeatedly reduced due to its rebalance policy in the early stages prior to a hyperinflation event to levels where it might be holding 10% or less of its original amount of gold purchased, only to then see gold soar in price. In contrast someone who bought and held (non rebalanced) 10% of gold might have similar levels of hyperinflation protection/hedge. For years the rebalanced approach might have carried a heavier burden/load of gold, when alternatives might have been better assets to hold, and when the crunch occurs the rebalanced approach might have similar or maybe even worse hedge/protection due to having sold off chunks too early.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Kelly »

Which one? When? Where? And why should we believe in that person's credibility?
Charlie Ellis http://money.cnn.com/2013/10/01/investi ... ce=cnn_bin
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Bustoff
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Re: Jack Bogle says rebalancing is overhyped?!

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Gambler wrote:http://money.cnn.com/2013/10/01/investi ... ce=cnn_bin

So how do you rebalance when what you're supposed to buy looks so risky? One approach: Skip it. Jack Bogle thinks you can. The Vanguard founder has long maintained that the value of rebalancing is overhyped.

huh? This is the first I've heard of this?!
Below Mr. Bogles shares his thoughts on rebalancing. The following question and answer is from "The Bogle eBlog".

Dear Mr. Bogle,
First of all, I want to thank-you for founding Vanguard and for promoting indexing. I have had an account with Vanguard for about five years. After spending many years of investing in managed funds and individuals stocks, I have learned my lesson about the power of indexing.
This week I read your new book “The Little Book of Common Sense Investing,” in which you make a compelling case for limiting stock investments to an all stock market index. It is a wonderful book with a clear and powerful message.
My question relates to pages 205-206 of the book. While you favor the all-US stock and bond market approach, you state that adding a total international stock index fund (of no more than 20%) is a reasonable alternative. With three such index funds in a portfolio (All-US Stock Market, All-US Bond Market & Total International Stock Index), is there a need for rebalancing on a periodic basis?
I have heard many investment advisors talk of the need to rebalance a portfolio on a yearly basis to maintain the original asset allocation. I wonder if rebalancing is inconsistent with the premise of indexing and whether the power of indexing means that the investor should continue to make investments based on the original investment formula, regardless of how the funds have performed in the past rather than constantly changing the mix of new investments to maintain the original the original investment balance. I would greatly appreciate your views on whether rebalancing hurts or helps the benefits of indexing.
Thank-you very much and best wishes,
RJM


Hi, Mr. M,
Sorry it’s taken me so long to respond to your thoughtful note. Busy!
We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48% S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.
We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big. (I’m asking my good right arm, Kevin, to send the detailed data to you.)
My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.
In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.
Use your own judgment, but perhaps these comments will help.
Best,
Jack

http://johncbogle.com/wordpress/category/ask-jack/
Last edited by Bustoff on Mon Oct 14, 2013 7:21 am, edited 1 time in total.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Clive »

..Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big..

As I suggested earlier, buy call option like (slightly less more often, a lot more periodically) rather than rebalancing being sell call option like (more often slightly more, less often a sizeable 'loss').
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Bustoff »

I got the impression the OP was more interested in the suggestions and opinion of Jack Bogle.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

I found also (as did Bogle) the compound return advantage of re-balancing the 50/50 portfolio over the time periods since 1972 when it outperformed the unrebalanced portfolio was about 0.5% or less -- not including rebalancing costs. What Bogle calls "noise". The advantage in volatility reduction was typically about 10% annualized -- not large.
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Re: Jack Bogle says rebalancing is overhyped?!

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Here is the NY times article that Mr. Bogle referenced.
http://www.nytimes.com/2007/05/06/busin ... wanted=all
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Re: Jack Bogle says rebalancing is overhyped?!

Post by NoRoboGuy »

Clive wrote:..Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big..

As I suggested earlier, buy call option like (slightly less more often, a lot more periodically) rather than rebalancing being sell call option like (more often slightly more, less often a sizeable 'loss').
Hard to believe Mr. Bogle of all people would be casual about 50 basis points, much less 200-300, difference in returns. When passive investing, every advantage should be taken, no matter how small. Certainly transaction costs and taxes need to be taken into account.

The decision to rebalance or not is a decision about need, ability, and willingness to take risk. If I take a 50/50 allocation but also decide not to rebalance, then I am actually willing to accept a higher stock allocation than 50%. That's the point that needs to be emphasized IMHO. While rebalancing is a personal choice, the choice has a known consequence in terms of risk. It is not just about differences in return.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by YDNAL »

.

I think Jack Bogle has done MORE than his fair share in helping the little guy/gal.

Bogle has also become less steady "in staying the course" as he aged. He suggests (advice?) hold Age in Bonds (Fixed):
  • If you don't rebalance Equities/Fixed, how exactly do you hold your age in Fixed ?
  • If you add social security benefits to Fixed, how do you do it ?
Our AA decisions should be based on each person's Ability & Need for risk, plus their Willingness (psychological) to take the risk. If Mr. Bogle changes his mind - contradicting himself a few times along the way - treat it as you would treat other noise.

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Clive
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Clive »

louis c wrote:Hard to believe Mr. Bogle of all people would be casual about 50 basis points
That's not a consistent result, over other periods it could swing the other way.
louis c wrote:If I take a 50/50 allocation but also decide not to rebalance, then I am actually willing to accept a higher stock allocation than 50%.
Depending upon how frequently you rebalance, you might be holding 60% or more stock weighting under a rebalanced approach. Once yearly rebalance, stocks rise 20% during the year for instance.

Consider in contrast Robert Shiller's data since 1870. Had you started with 50% stock and not rebalanced, you'd have peaked at 50.2% stock, averaged 27% stock, assuming blended with a CPI+1% asset and stock dividends were added to the 'bond' part. To 2012 that yielded 2.5% real.

The lows under such a approach - when there was less than 15% stock (assuming accumulation) relative to the whole, tended to coincide with periods when stocks were deeply discounted, such that if more was added into stocks upon seeing such relatively low stock exposure levels compared to the whole, you'd have likely done so at opportune times.

1918, stock weighting down to 15%, adjust to 50%; 1980 stock weighting down to 18%, adjust to 50% and overall 1870-2012 of 42% average stock exposure and a 3.5% real.

Consider also a case of where whatever stock you invested in halved each year for 3 years in a row, before going broke. Under yearly 50/50 rebalancing you would have injected 80% of the total portfolio value into that stock (be left with just over 20% of what you originally started with in total). Not rebalancing limits the loss.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by dbr »

Clive wrote: Consider in contrast Robert Shiller's data since 1870. Had you started with 50% stock and not rebalanced, you'd have peaked at 50.2% stock, averaged 27% stock, assuming blended with a CPI+1% asset and stock dividends were added to the 'bond' part. To 2012 that yielded 2.5% real.

Thanks for your comment regarding how this can work. I would however take exception to the reinvestment of stock dividends in bonds. This is a kind of "rebalancing" out of stocks into bonds that seems odd. In fact it means cutting the returns from stocks about in half and adding that return to bonds. That gives bonds a "return" that is not commensurate with their risk (volatility) and leads to the result of averaging 27% stocks. A result with stock dividends reinvested in stocks will surely leave the investor in nearly all stock at the end.

The lows under such a approach - when there was less than 15% stock (assuming accumulation) relative to the whole, tended to coincide with periods when stocks were deeply discounted, such that if more was added into stocks upon seeing such relatively low stock exposure levels compared to the whole, you'd have likely done so at opportune times.

1918, stock weighting down to 15%, adjust to 50%; 1980 stock weighting down to 18%, adjust to 50% and overall 1870-2012 of 42% average stock exposure and a 3.5% real.

Consider also a case of where whatever stock you invested in halved each year for 3 years in a row, before going broke. Under yearly 50/50 rebalancing you would have injected 80% of the total portfolio value into that stock (be left with just over 20% of what you originally started with in total). Not rebalancing limits the loss.

Right, a strategy of no rebalancing into stocks while possibly rebalancing out of stocks would be more conservative and will result in a lower allocation to stocks on average compared to constant rebalancing. An alternative is to begin with a lower allocation to stocks but rebalance frequently. Personally I find a little higher allocation to stocks and a rule to not rebalance into stocks to be a comfortable strategy.

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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

One other observation I made is that rebalancing doesn't always lower portfolio risk (defined as portfolio volatility). When you rebalance by selling bonds to buy stocks, portfolio volatility is subsequently increased (compared to not rebalancing), which of course makes sense. For example, you can see this in 2009 for annual year-end rebalancing at the beginning of the year following a large market decline in 2008. For 2009 through 2010, the volatility of the rebalanced 50/50 portfolio was 10% greater than the unrebalanced portfolio, while the risk-adjusted return (Sharpe ratio) was 12% lower. Even more dramatically, from 2000 to 2012 (13 years) the volatility of an annually rebalanced 50/50 portfolio has been 30% higher than an unrebalanced portfolio, with a slightly smaller Sharpe ratio. What happened in the years from 2000 through 2002 is that annual rebalancers kept moving money into stocks every year, and stocks kept declining for 3 years. This increased portfolio volatility but this didn't translate into higher returns.

So, you don't get something for nothing when you rebalance into equities after a decline. You are assuming a greater volatility risk in hopes for a higher return, which may or may not materialize. It also illustrates the finding that formulaic rebalancing is often mean-variance inefficient; i.e., it doesn't increase returns commensurate with the assumed additional volatility -- hence the lower Sharpe ratio. In fact, the more frequent the rebalancing the more inefficient it is even without accounting for the additional trading costs.
Last edited by Browser on Mon Oct 14, 2013 5:18 pm, edited 2 times in total.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Clive »

I would however take exception to the reinvestment of stock dividends in bonds. This is a kind of "rebalancing" out of stocks into bonds that seems odd
If your cash account is considered as 'bonds', then stock dividends are more normally added to 'bonds'. You have to either opt into having dividends automatically reinvested in additional stock, or manually implement that action if that's your preference. Leaving stock dividends accumulating into a linked cash savings account is the more non-rebalanced (no action) approach.

There are advantages to managing things that way. If you're 50% stocks that pay 5% dividend, and cash earns 5%, then combined that's 10% of the stock value being deposited into cash each year - such that -10% declines in stock prices are hedged by such income. Stocks down -50% one year = -25% relative to total portfolio value, with 5% of total portfolio value received as income = -20% down overall.

For rebalancing, matching stock price only changes with cash is generally the better choice as the two are more likely to align overall. If cash has relatively outperformed stock prices then that's indicative that stock prices might be relatively low. Adding dividend income back into stocks distorts that. i.e. over the longer term generally stock prices pace inflation, but in a volatile manner, and cash also paces inflation but generally does so in a less volatile manner.

I guess the better choice might perhaps be to have half of dividends reinvested, half left in cash.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by dbr »

Clive wrote:
I would however take exception to the reinvestment of stock dividends in bonds. This is a kind of "rebalancing" out of stocks into bonds that seems odd
If your cash account is considered as 'bonds', then stock dividends are more normally added to 'bonds'. You have to either opt into having dividends automatically reinvested in additional stock, or manually implement that action if that's your preference. Leaving stock dividends accumulating into a linked cash savings account is the more non-rebalanced (no action) approach.

I see where you are getting your idea, but I would have to say that is not how investment theory looks at such things. In the conventional view asset allocations, the growth of investments, rebalancing, and all the rest are based on assigning a return to each asset class. Return includes interest and dividends paid and market value changes of the asset. In short the standard characterization of the properties of asset classes considers taking dividends out to be a withdrawal and reinvesting dividends as part of the compounded return of the asset. As with all terminology, it is not important what words exactly are used, but it is important to decide how to construct the example. Your construction is perfectly ok if that is what one chooses to do. On other hand, if one invests in stocks on the premise that one wants money in a riskier, higher returning investment, then you have to reinvest the dividends to obtain the compound growth of that investment that you intend. Otherwise you are undoing your own strategy.

There are advantages to managing things that way. If you're 50% stocks that pay 5% dividend, and cash earns 5%, then combined that's 10% of the stock value being deposited into cash each year - such that -10% declines in stock prices are hedged by such income. Stocks down -50% one year = -25% relative to total portfolio value, with 5% of total portfolio value received as income = -20% down overall.

For rebalancing, matching stock price only changes with cash is generally the better choice as the two are more likely to align overall. If cash has relatively outperformed stock prices then that's indicative that stock prices might be relatively low. Adding dividend income back into stocks distorts that. i.e. over the longer term generally stock prices pace inflation, but in a volatile manner, and cash also paces inflation but generally does so in a less volatile manner.

I guess the better choice might perhaps be to have half of dividends reinvested, half left in cash.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Clive »

I see where you are getting your idea, but I would have to say that is not how investment theory looks at such things. In the conventional view asset allocations, the growth of investments, rebalancing, and all the rest are based on assigning a return to each asset class.
Conventional wisdom is not necessarily right. Stocks are a leveraged asset, typically having 1:1 debt/equity ratio's on average. 50-50 stocks/cash deleverages that - similar to whatever cash you had deposited in the bank then being lent to the stock.

The conventional approach of comparing and asset allocating based on something that is 2x leveraged (stocks) with a non-leveraged (cash) just complicates matters.

There are some who prefer to asset allocate based on more levelled comparisons - such as risk parity.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Dandy »

I never thought to re balance to capture some rebalancing bonus. For me it is to control risk. To me, up to a point, the higher your equity allocation the greater long term return. So, anytime you sell equities to buy fixed income you are probably trading potential extra gains for a bit less volatility. There is nothing "wrong" with that or "right". As your equity allocation rises you have to ask yourself am I comfortable with more risk?

The danger is that you let recent great market performance reset your risk tolerance --it is tough to leave the party when you are having so much fun. Of course it can be the opposite if market performance is very poor - again your risk tolerance can get reset not to buy more "risky" equities. If you have a tested risk tolerance then you want to be real careful not to let recent performance or the media reset it for you.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by YDNAL »

Dandy wrote:I never thought to re balance to capture some rebalancing bonus. For me it is to control risk. To me, up to a point, the higher your equity allocation the greater long term return. So, anytime you sell equities to buy fixed income you are probably trading potential extra gains for a bit less volatility. There is nothing "wrong" with that or "right". As your equity allocation rises you have to ask yourself am I comfortable with more risk?
"Comfortable" is psychological. As (more?) important, what is the potential tradeoff & magnitude of benefit vs. more risk.
  • The difference (illustration) between 60/40 versus 40/60 in *hoped-for* return is 0.6%.
  • What is potential exposure for added risk (perhaps unrecoverable in our lifetime) ?... It is perhaps 10%, ___% of the total portfolio.

Code: Select all

Equities:	4%	real return
Fixed:	   1%	real return

Equities   Fixed    Total Real Return
80			20			 3.40 
75			25			 3.25 
70			30			 3.10 
65			35			 2.95 
60			40			 2.80 
55			45			 2.65 
50			50			 2.50 
45			55			 2.35 
40			60			 2.20 
35			65			 2.05 
30			70			 1.90 
25			75			 1.75 
20			80			 1.60
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

I got to thinking about when I first started "investing" my earnings. Back then, I had TIAA-CREF and you had to decide how to divide your monthly contributions from your paycheck. You had two choices: TIAA Fixed, which was like a savings account earning interest, and CREF stock, which was a broad U.S. equity fund. These were two different accounts. One was like a safe interest-paying account, and the other was like a "growth" account that offered future growth of your capital. You made your decision about how much you wanted in a "savings account" and how much you wanted in a "growth account". I opted to have half my monthly contribution go into each.

The idea here was that you allocated your contributions to savings and growth in the proportion that made the most sense to you at the time. These accounts would then accumulate on separate tracks. The balances of the two accounts grew at their own paces. You expected that, if things went well, the "growth" account would grow more than the savings account. You just kept on putting in the designated proportion of you contributions month-after-month, year-after-year.

Perhaps at some point, you might decide to change the proportion of your contributions going into each account. But nobody ever thought about moving money from one account to the other based on recent performance, which is what "rebalancing" is. That would have seemed like an odd idea, and it would have been cumbersome and requiring a lot of paperwork to do anyway. Actually, when you think about it, it is an odd idea, at least in the case where you have two types of accounts with different purposes: savings and growth. If you have a growth account, why on earth would you take money out of it and move it into savings when it "grows"? That's what it's supposed to do. If you have a savings account, why on earth would you rob that to put more money into your growth account just because the growth account might have hit a rough patch? That's what happens sometimes.

Thinking back, the way we did it back then makes more sense to me than so-called "rebalancing" between stocks and bonds. That perspective is short-sighted, and has the investor moving money around based on recent, short-term behavior of his "savings" and "growth" assets. Once you've decided on how much of your new capital should be going into stable savings and how much should be going into growth, it makes more sense to me to stick with your decision and let those accounts "do their own thing" -- at least until time has passed and you may have re-evaluated how much you want going into each of these. It's nice to know that most of the research on "re-balancing" that I've seen seems to suggest that your overall, total outcome is going to be about the same if you do this instead of fiddling around moving money back and forth anyway.

I think we started to lose our way when MPT came along, and we started thinking of our investments as abstract mathematical entities called "asset classes," rather than thinking about the purpose of investing in each asset.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by YDNAL »

Browser wrote:If you have a growth account, why on earth would you take money out of it and move it into savings when it "grows"?
Because a transfer from the "growth" account completes (perhaps gets you closer to) your "savings" goal.

A question for you. If that ↑ above is the case, why would you take exponentially more risk on the "growth" account ? You are not assuming that "growth" comes without risk, do you ? :)
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Clive
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Clive »

Dandy wrote:I never thought to re balance to capture some rebalancing bonus
Rebalance bonus - or cost averaging bonus - or ... whatever you want to call it.

Take a model of a stock whose price rises with inflation over the longer term, but does so in a volatile manner. It also pays a 5% dividend, and let's assume inflation = 5%.

Blend that 50/50 with an inflation bond that rises with inflation, but in a low volatile manner (tracks inflation closely), and add the stocks dividend to that 'cash' pot each year and you have a cash pot that rises 5% real each year (assuming dividends to be stable).

If stock prices are down -20% nominal one year = -25% real (after inflation), the cash pot however has risen +5% real (inflation bond with stock dividends added in). So there's a degree of inverse correlation in years when stocks decline.

Next year, to get back to break even from a -25% real loss, stock prices might gain 33.3% real. Over the two years, stock prices overall gained/lost 0% real. In the year when stocks rose, the cash pot also rose i.e. was positively correlated.

50/50 those rebalanced yearly and in the first year 0.5 allocation to stocks declines down to 0.375. 0.5 allocation to cash with dividends added rises to 0.525. Combined = 0.9 i.e. the portfolio's down -10% that year.

Next year 0.45 (after rebalancing) exposure to stocks that rise 33% to 0.6 value, and 0.45 exposure to a 5% gain to 0.4725 value = 1.07235 combined value. Over the two years the portfolio is up 7.235% real. Yet stock prices just paced inflation over the two years (but paid a 5% yearly dividend), and cash just paced inflation. 50% in stocks that pay 5% dividend = 2.5% benefit each year relative to total portfolio value, a 5.06% compounded benefit over the two years. Yet the portfolio is up 7.235% over the two years.

That extra came from inverse correlation and rebalancing.

50/50 stocks with inflation bonds has exposure to debt (stocks borrow) and lending (cash deposit, or buying Treasury bonds (loan to the State)). Inflation bonds are neutral to inflation, stocks are also a volatile inflation hedge. Blending and rebalancing a volatile inflation pacing/exceeding asset with a stable inflation pacing asset will generally reward more than not rebalancing.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

YDNAL wrote:
Browser wrote:If you have a growth account, why on earth would you take money out of it and move it into savings when it "grows"?
Because a transfer from the "growth" account completes (perhaps gets you closer to) your "savings" goal.

A question for you. If that ↑ above is the case, why would you take exponentially more risk on the "growth" account ? You are not assuming that "growth" comes without risk, do you ? :)
You miss my point entirely, which was to say that formulaic rebalancing or any other mathematical strategy is somewhat misguided - at least in terms of the "rationales" that are commonly purveyed. At some point down the road, I might surely decide to transfer money from growth to savings in order to harvest some of that growth, and if I was more confident that I were getting close to my hoped for outcomes from that account and could afford to deplete it. The whole idea of growth is that it compounds over time, so when I start siphoning off the returns, I dilute that key component of growth. But that's a strategic choice, infrequently made, and a long-long way from "rebalancing" as it is being sold by financial gurus. Heck, I would have done that even before anybody invented the term "rebalancing" (oh, gee, I think I actually did).
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Re: Jack Bogle says rebalancing is overhyped?!

Post by YDNAL »

Browser wrote:
YDNAL wrote:
Browser wrote:If you have a growth account, why on earth would you take money out of it and move it into savings when it "grows"?
Because a transfer from the "growth" account completes (perhaps gets you closer to) your "savings" goal.

A question for you. If that ↑ above is the case, why would you take exponentially more risk on the "growth" account ? You are not assuming that "growth" comes without risk, do you ? :)
You miss my point entirely,....
You missed the humor [or attempt] entirely.

We agree, growth is an mean to an end.
  • Eventually, we hope to reach (or approach) the end!
    Browser wrote:At some point down the road, I might surely decide to transfer money from growth to savings in order to harvest some of that growth, and if I was more confident that I were getting close to my hoped for outcomes from that account and could afford to deplete it.
  • Now, if we could only reach the end while also stopping the clock. ← humor!
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

I've been missing for a long time now. :)
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Electron »

Note that if stocks performed very well over 30 years relative to bonds, an initial 50% allocation to stocks could increase to as much as 70%-90%.

If one was in the accumulation phase, annual investments could be directed to the asset class below target. If one was in the withdrawal stage, money could be withdrawn from the asset class over target.

The actual allocation percentages can also be calculated on a before tax or after tax basis.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by CantPassAgain »

I never thought of rebalancing as anything other than maintaining a risk profile. If I decide on day one that I am comfortable with 50/50 or some kind of glide path or whatever, then in the absence of some fundamental change in my need/ability/willingness to take risk, then that is what I should stick with through thick and thin. No one knows the future and all you can do is set your asset allocation and run with it.

Then again, I don't rebalance unless I get out of whack +/-10% so for the great majority of my investing life the argument is moot anyway.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Browser »

Strevlac wrote:I never thought of rebalancing as anything other than maintaining a risk profile. If I decide on day one that I am comfortable with 50/50 or some kind of glide path or whatever, then in the absence of some fundamental change in my need/ability/willingness to take risk, then that is what I should stick with through thick and thin. No one knows the future and all you can do is set your asset allocation and run with it.

Then again, I don't rebalance unless I get out of whack +/-10% so for the great majority of my investing life the argument is moot anyway.
Let me ask a hypothetical question: Is having $500K in stocks the same risk as having $250K in stocks? Actually, that's a loaded question. Most people would probably say that $500K in stocks is riskier than $250K, because you stand to lose a lot more dollars if stocks really head south. In 2008, for example, you would have lost $185K with $500k in TSM. But according to the notion that "risk" is a function of percentage allocations, $500K and $250K in stocks would be equally risky in the context of a $1M and $500K total portfolios respectively (since in each case the allocation is 50%). As the portfolio grows in size, the "risk profile" changes, so what's the point of trying to stick with a static percentage allocation formula in the first place? I never did understand this line of thought. Periodically, the investor has to evaluate his investment goals and determine how much of his accumulated wealth needs to be exposed to "growth" assets, which are risky and could lose money. Then he should adjust his portfolio holdings accordingly. That's really about all there is to it, IMO.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by CantPassAgain »

Browser wrote:Let me ask a hypothetical question: Is having $500K in stocks the same risk as having $250K in stocks? Actually, that's a loaded question. Most people would probably say that $500K in stocks is riskier than $250K, because you stand to lose a lot more dollars if stocks really head south. In 2008, for example, you would have lost $185K with $500k in TSM. But according to the notion that "risk" is a function of percentage allocations, $500K and $250K in stocks would be equally risky in the context of a $1M and $500K total portfolios respectively (since in each case the allocation is 50%).
Either you are overthinking this or I am underthinking it. I define risk very simply. It is an asset allocation and glidepath that I can stick to, understanding that equities are volatile and can do anything at any time for any reason whatsoever. Or for no reason at all. A risk profile is based on one's willingness, need, and ability to take risk. If had $1,000,000 then I would have less need to take risk so I would change my risk profile and dial back on the equities. Makes sense to me.

No one is saying a risk profile absolutely has to remain static no matter what. That's what glidepaths are all about.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by YDNAL »

Browser wrote:Let me ask a hypothetical question: Is having $500K in stocks the same risk as having $250K in stocks? Actually, that's a loaded question. Most people would probably say that $500K in stocks is riskier than $250K, because you stand to lose a lot more dollars if stocks really head south. In 2008, for example, you would have lost $185K with $500k in TSM. But according to the notion that "risk" is a function of percentage allocations, $500K and $250K in stocks would be equally risky in the context of a $1M and $500K total portfolios respectively (since in each case the allocation is 50%).
Risk can be defined as anything one wishes... you just did.
But according to the notion that "risk" is a function of percentage allocations,..
  • If $500K and $250K are reduced in 1/2, then the added risk is $125K.
  • Risk only that which you have a *need* to risk and will not send you to the soup line.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by _james »

I read all these posts and don't really know where to put my monthly contributions now. I use a rebalance calculator for that very reason.

Maybe my desired asset allocation should be renamed to contribution allocation?
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Benjamin Buffett »

Personally I haven't really bothered with rebalancing all that much, I added excess money to the lowest asset class, but kept regular contributions distributed equally to each asset class based upon the percentages I choose when setting it up.....after considering Mr. Bogle's words it reinforced a notion I was already wondering: is rebalancing adding complexity and cost, am I over-managing? My best answer to the question be the following:
* Asset Allocation primarily pertains to contributions, regression to the mean will suck rising asset classes back down given time, and falling asset classes back up, given enough time.........this means that rebalancing probably isn't that important over the long term.....theoretically speaking
* Rebalancing increases costs and complexity slightly, however asset allocation of contributions is very important
* A portfolio that doesn't worry about rebalancing can be left pretty much on autopilot with no human contact whatsoever except to occassionally check the funds every so often
* We are likely to adjust our risk ratio based on our age and retirement dates anyway.......so there isn't much point in rebalancing until we want to do that, then we can kill two birds with one stone.
* Personally I think if I rebalance at all it will be every decade when I nudge up my bond allocation slightly, and when I start withdrawing I will draw from whatever asset class is above its percentage.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by rasta »

rebalancing = market timing
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Benjamin Buffett »

I would have to agree that rebalancing, outside of adjusting your risk preference(bond allocation) as you age, does have a similarity to active management and market timing. I expect gliding into a 60/40 allocation when a person is ready for retirement, or even a 50/50 allocation would be a good idea......of course in that case that would be "you timing" rather than market timing, ie tailoring the portfolio for your needs rather than jostling things around in an attempt to get extra revenue or "free" risk reduction.

Rebalancing, outside of adjusting your bond allocation as per your distance from retirement, adds two things:
* Complexity
* Cost

Without really making a larger return than just leaving it alone.....in fact one might actually come out with a slightly smaller balance after rebalancing.

In active management and timing the market you essentially would make what a passive investor would make, except a little less when one includes the fees, at least on average as a group that is. You would increase with active management complexity and cost, and not make very much more.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by azanon »

nisiprius wrote: Thu Oct 10, 2013 10:05 amOn the other hand, if you rebalance frequently, or almost continuously, e.g. by holding a fund like Vanguard Balanced Index, you are certain to rebalance near the bottom--but, in fact, the effect of mean reversion is not captured, and, as I was surprised to discover, there is virtually no rebalancing bonus.
I saw where others above got it, but the point of rebalancing is (should be) to maintain your originally-intended risk level on a consistent basis. This is so important and relevant where rebalancing is concerned, that you should be willing to give up any bonus (if there is one), if there were some easy way to rebalance every day. If that's the truth of the math - that daily rebalancing kills the bonus - then so be it. Balanced funds (not counting taxable accounts) are the gold standard AFAIK, for rebalancing.

Yes, there is higher expected return for letting stocks run for extended periods of time. And there should be, since there's more risk doing that.

(General statement) Return is the amateur metric. The wise look at risk-adjusted returns.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Benjamin Buffett »

Indeed, that's why I said if rebalancing were to be done, it would make sense to do it when one adjusted their bond allocation as they progress towards their target date. Otherwise DCA and very long time scales make the risk somewhat minor.....as if an investor can wait long enough they are likely to have an above average price on the asset in question that they desire to liquidate......

Even if the stock allocation progresses to 90% from a 60% the original monies invested are still at the asset allocation risk....stocks have become more valuable and the risk therein is offset by the added gain, while the undervalued asset classes have less proportional "risk", which is why their growth was slower. Rebalancing allows one to perceive less risk, while adding complexity. I don't think I would bother with rebalancing except when I approach a target date to nudge the bond allocation, or possibly rebalance every decade. I have to agree with Jack Bogle on this one.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by 2015 »

dbr wrote: Sun Oct 13, 2013 11:56 am
Phineas J. Whoopee wrote:
The problem starts with jumping on sound-byte quotes from someone in which there is no context and no consideration of the fact that in investing the first part of the answer to any question is always "It depends . . . " People need to stop trying to invest based on "X says _______________."
This.
Good to see the Rebalancing Debate dance is back in style. Many thanks to Mr. Bogle for keeping the boogie alive. When the overconfident disagree, it probably doesn't matter.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by retiredflyboy »

All things in moderation might cover this one. My AA 40-60 stock to bond. If I get beyond 10% variance I will rebalance, but have never gotten there. If I have new money and I can add at my 40 - 60 without going beyond my 10% variance threshold, I do. I don’t think a person who is 42- 58 needs to rebalance, but if it helps one stay the course or sleep better fine. Don’t really se rebalancing as market timing, but rather keeping the AA in your comfort zone. I am comfortable any where from 30-70 to 50-50. Keep it simple, don’t mess with it much and sleep well.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by siamond »

Gambler wrote: Thu Oct 10, 2013 9:43 am http://money.cnn.com/2013/10/01/investi ... ce=cnn_bin

So how do you rebalance when what you're supposed to buy looks so risky? One approach: Skip it. Jack Bogle thinks you can. The Vanguard founder has long maintained that the value of rebalancing is overhyped. [...]
May I point out that this is an old thread which was started in 2013 and somehow recently revived? And that the link to the article being quoted is now dead?

I mean, it's a timeless topic, but there has been multiple other threads on this forum which discussed the matter in more depth. The wiki page is also quite helpful.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by Benjamin Buffett »

Rebalancing and Black Holes

Image
"The Assets of a Star Being Rebalanced with those of a Blackhole"

* Stocks , or any other given asset, or even a national stock exchange altogether can fall and keep falling.....think of the Japanese economy
* Market exchanges could be nationalized should a change in governance occur......see collectivization of farm businesses in Soviet nations

Rebalancing can make sense if you think that you know that reversion to mean will occur in your lifetime.....the question is do you have a crystal ball? Do you know that the prices will bounce upwards again.....in time for you to extract the money for retirement.

For the sake of argument lets imagine that we have an asset that begins trending downwards......and it just keeps falling, and we keep rebalancing into the asset that is just endlessly falling. This asset will, for the sake of argument never rebound in our lifetime.......it is essentially a black hole, money that enters will never leave with its original value, for the sake of argument within our lifetime........and we just keep dumping money from assets that are producing returns into this rapidly collapsing asset, and we just keep letting it spaghettify our entire portfolio.......if we automated the rebalancing process this could happen without us even noticing, hypothetically providing we never let the news or market publications impact our strategy.

Thus rebalancing has a hidden risk, the risk that an asset can collapse into a figurative singularity and pull our productive assets into its event horizon, beyond our reach to withdraw it for retirement, resulting in a net loss.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by columbia »

Benjamin Buffett wrote: Tue Jan 01, 2019 5:38 pm Rebalancing and Black Holes

Image
"The Assets of a Star Being Rebalanced with those of a Blackhole"

* Stocks , or any other given asset, or even a national stock exchange altogether can fall and keep falling.....think of the Japanese economy
* Market exchanges could be nationalized should a change in governance occur......see collectivization of farm businesses in Soviet nations

Rebalancing can make sense if you think that you know that reversion to mean will occur in your lifetime.....the question is do you have a crystal ball? Do you know that the prices will bounce upwards again.....in time for you to extract the money for retirement.

For the sake of argument lets imagine that we have an asset that begins trending downwards......and it just keeps falling, and we keep rebalancing into the asset that is just endlessly falling. This asset will, for the sake of argument never rebound in our lifetime.......it is essentially a black hole, money that enters will never leave with its original value, for the sake of argument within our lifetime........and we just keep dumping money from assets that are producing returns into this rapidly collapsing asset, and we just keep letting it spaghettify our entire portfolio.......if we automated the rebalancing process this could happen without us even noticing, hypothetically providing we never let the news or market publications impact our strategy.

Thus rebalancing has a hidden risk, the risk that an asset can collapse into a figurative singularity and pull our productive assets into its event horizon, beyond our reach to withdraw it for retirement, resulting in a net loss.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by longinvest »

Benjamin Buffett wrote: Tue Jan 01, 2019 5:38 pm For the sake of argument lets imagine that we have an asset that begins trending downwards......and it just keeps falling, and we keep rebalancing into the asset that is just endlessly falling. This asset will, for the sake of argument never rebound in our lifetime.......it is essentially a black hole, money that enters will never leave with its original value, for the sake of argument within our lifetime........and we just keep dumping money from assets that are producing returns into this rapidly collapsing asset, and we just keep letting it spaghettify our entire portfolio.......if we automated the rebalancing process this could happen without us even noticing, hypothetically providing we never let the news or market publications impact our strategy.
There are two easy mitigating solutions to this:
  • Infrequent rebalancing: have a policy to never rebalance frequently (e.g. no more than once a year, for example). This significantly dampens the "black hole" risk.
  • Productive assets: always invest into widely diversified funds covering broad asset classes with an internal driver of returns, such as investment-grade bonds, and investment-grade stocks. The coupons of bonds are their internal return driver, as for stocks, it's the profits of their companies that are the driver. In other words, never invest into assets that need a "greater fool" that pays more than one has paid to make a profit, such as gold.
Of course, none of the above eliminates the possibility of total loss. A Russian investor, in the early 1900s, lost everything when the government confiscated all property, regardless of having rebalanced his portfolio or not. Holding international investments through a domestic broker wouldn't have protected him. Government bonds were no safer store of wealth. For those interested by such end-of-the-investing-world scenarios, William Bernstein's Deep Risk, the third booklet of his awesome Investing for Adults series, provides an interesting reflection about such concerns.

Investing into productive assets doesn't protect against loss (some companies go bankrupt, some investment-grade bonds develop credit problems), but, in general, when an entire productive asset class gets cheaper, it's usually a good time to buy more of it. So, as long as one buys diversified funds covering broad productive asset classes, one should rebalance his portfolio.

In general, adding bonds to a portfolio is a risk management decision, not a return maximization strategy, and rebalancing goes along with that decision. I've explained this in these two posts:
viewtopic.php?f=10&t=262077&p=4182112#p4179086
viewtopic.php?f=10&t=262077&p=4182112#p4181007
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: Jack Bogle says rebalancing is overhyped?!

Post by X528 »

letsgobobby wrote: Thu Oct 10, 2013 10:59 am assuming RTM, rebalancing from high to low return assets naturally reduces returns. So I've never understood rebalancing as a way to goose returns. I've always understood rebalancing as a way to reduce risk: from high to low risk assets. I take what returns the markets give me, but only at the level of risk that I knowingly choose to take. Taking more risk than planned/desired may lead to higher returns, or not - but the higher risks are always there.
What about rebalancing for a Japanese investor - with a long-term decreasing or flat stock market?
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Re: Jack Bogle says rebalancing is overhyped?!

Post by longinvest »

X528 wrote: Tue Jan 01, 2019 6:46 pm
letsgobobby wrote: Thu Oct 10, 2013 10:59 am assuming RTM, rebalancing from high to low return assets naturally reduces returns. So I've never understood rebalancing as a way to goose returns. I've always understood rebalancing as a way to reduce risk: from high to low risk assets. I take what returns the markets give me, but only at the level of risk that I knowingly choose to take. Taking more risk than planned/desired may lead to higher returns, or not - but the higher risks are always there.
What about rebalancing for a Japanese investor - with a long-term decreasing or flat stock market?
Here's what happened (portfolio rebalanced annually):

Help finding chart concerning diversification and Japanese stock market crash
longinvest wrote: Fri Dec 07, 2018 6:47 pm There's this thread: viewtopic.php?f=10&t=23036&start=100#p2379273

The chart's link is broken. Here it is fixed (by replacing postimg.org with postimg.cc in the link):
Image
Some terrific additional reading on the Bogleheads blog:
siamond wrote: Fri Dec 07, 2018 7:09 pm I guess longinvest figured out the right answer (well done!), but the OP might also be interested in this modest write-up of mine about the Japanese crisis and the value of Int'l diversification, which triggered some lively discussion on the forum. Click on the link below.

A short study of the recent Japanese crisis
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Re: Jack Bogle says rebalancing is overhyped?!

Post by MnD »

Stocks usually gain more than bonds so not rebalancing means you are on a road to increasing equity allocations as you go through life.
I use 5 percentage point divergence from equity/fixed income AA to trigger rebalancing. Rebalancing is fairly rare event with that criteria - it can go years in-between. I explicitly do not micro-rebalance with new money or when making other transactions for non-rebalancing reasons.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Re: Jack Bogle says rebalancing is overhyped?!

Post by danielc »

NoRoboGuy wrote: Sun Oct 13, 2013 1:17 pm If one assumes the purpose of holding bonds and stocks is to manage risk in a portfolio, the ratio between the two today is relevant to whatever risk event may occur tomorrow.
You've used a definition of risk that is not universal. The only risk that I care about is the risk of not having money to live with a minimum of comfort. Suppose I have $500K in Treasury ladder and $500K in stocks and my expenses in next 10 years will be $500K. The next day stocks drop by 90% so now I have $500K in Treasuries and $50K in equities. Right now the "risk" of my portfolio is about the same as it was yesterday, but if I were to rebalance now I would run a serious risk of becoming poor in the next 10 years. So you see, my risk tolerance in this example is not "50/50". My risk tolerance is "$500K in safe assets".
NoRoboGuy wrote: Sun Oct 13, 2013 1:17 pm So if my risk tolerance is 50/50, and by market proceedings the ratio today is 33/67, I am no longer exposed to the amount of risk I planned. I rebalance to restore to the risk level planned. I supposed I just do not understand why it is not that simple.
See my example above.
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