A case for rebalancing

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larryswedroe
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A case for rebalancing

Post by larryswedroe »

Hope you find it helpful, and that you're buying EM these days (:-))

http://www.cbsnews.com/news/the-case-for-rebalancing/

Best wishes
Larry
Call_Me_Op
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Re: A case for rebalancing

Post by Call_Me_Op »

Been buying EM all along - per IPS. :wink:
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livesoft
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Re: A case for rebalancing

Post by livesoft »

Based on all the threads on buying EM, I would've thought that nobody would need any more EM at this juncture.

Now if you had said, "... and that you're buying bonds these days (:-))", that would've been news. :)
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asset_chaos
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Re: A case for rebalancing

Post by asset_chaos »

Rebalancing to bonds for me. It's my stock/bond ratio that's gotten above plan. If I found a large enough dollop of cash---enough to right the stock/bond ratio and have some left over---then, yes, I'd probably buy some more EM small value.
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Mrxyz
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Re: A case for rebalancing

Post by Mrxyz »

Call_Me_Op wrote:Been buying EM all along - per IPS. :wink:
Pardon my ignorance, but what is EM? Is it Emerging Market?
Thanks
umfundi
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Re: A case for rebalancing

Post by umfundi »

Mrxyz wrote:
Call_Me_Op wrote:Been buying EM all along - per IPS. :wink:
Pardon my ignorance, but what is EM? Is it Emerging Market?
Thanks
Yes, EM is Emerging Markets, which the article does not mention.

Keith
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Mrxyz
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Re: A case for rebalancing

Post by Mrxyz »

umfundi wrote:
Mrxyz wrote:
Call_Me_Op wrote:Been buying EM all along - per IPS. :wink:
Pardon my ignorance, but what is EM? Is it Emerging Market?
Thanks
Yes, EM is Emerging Markets, which the article does not mention.

Keith
Thanks. That was kind of my confusion also that the article talked about REIT and not about EM. So what did I miss(understand)?
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k66
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Re: A case for rebalancing

Post by k66 »

Mrxyz wrote:Thanks. That was kind of my confusion also that the article talked about REIT and not about EM. So what did I miss(understand)?
I think Mr. Swedroe was reminding us that at least one of the common asset allocation elements has not done as well as other more spectacularly performing assets this past year. We might do well then to consider trimming some profit from our US Equities in order to bag some currently cheap Emerging Markets.
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basspond
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Re: A case for rebalancing

Post by basspond »

Rebalancing in theory is a good idea, but some thought has to go into how to handle the activity. Most mistakes in investing are made by selling off winners too soon and hanging on to "dogs" too long. Like investing, rebalancing should be an ongoing / long term activity.
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k66
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Re: A case for rebalancing

Post by k66 »

We should also remember the fundamental difference between rebalancing and (market) timing.

The sole purpose of rebalancing is to reduce volatility in the portfolio and makes no claim to improving the portfolio's overall return. It has nothing to do with trying to figure out how long to keep a winner, nor when to drop a dog because it has become too beat up. Rebalancing is best done, if you are going to do it at all, by using pre-established criteria. You could do it periodically (annually for example) or by range/percentage movements.
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Mrxyz
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Re: A case for rebalancing

Post by Mrxyz »

k66 wrote:
Mrxyz wrote:Thanks. That was kind of my confusion also that the article talked about REIT and not about EM. So what did I miss(understand)?
I think Mr. Swedroe was reminding us that at least one of the common asset allocation elements has not done as well as other more spectacularly performing assets this past year. We might do well then to consider trimming some profit from our US Equities in order to bag some currently cheap Emerging Markets.
Thanks.

but again, I do not mean to offend. but if we do what you mentioned above is it market timing - which we are NOT supposed to do?
Last edited by Mrxyz on Wed Nov 27, 2013 9:38 pm, edited 1 time in total.
john94549
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Re: A case for rebalancing

Post by john94549 »

Your desired AA can get out-of-whack in a number of ways. This year, one way it got out-of-whack was the out-performance of domestic versus international, and most egregiously, EM. My IPS calls for 80% domestic and 20% international in that portion of my AA dedicated to equities. In the international allocation, my IPS calls for a bit more EM than Vanguard provides in VTIAX.*

The confluence of (a) the out-performance of domestic, and (b) the under-performance of EM even against other international, led me to pick up a tad of VEMAX back in late May. That brought my overall AA back into balance.

It's not market-timing, it's math.

*VTIAX holds roughly 18% of its equities in EM, and my IPS suggests closer to 40% in EM for my international.
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nedsaid
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Re: A case for rebalancing

Post by nedsaid »

A good article by Larry. I think the reversion to the mean argument is one of the best for rebalancing.

I would caution that folks should not switch strategies to try to take advantage of valuations. For example, going between value and growth styles based on the book to market spreads. I don't believe in style timing. The reason is that the outperformance of value over growth or visa versa do not occur over predictable time periods. Perceived overvaluations and undervaluations can last a long time.

The academic research indicates that value strategies work more often than growth strategies. Over long periods of time, value outperforms growth. To me, the rational investor who believes the academic research would choose a value strategy over growth thus value tilting his/her portfolio. If you switch in and out of a strategy that works more often than not, you reduce your chances of guessing correctly and losing out on the benefits of that strategy.
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k66
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Re: A case for rebalancing

Post by k66 »

Mrxyz wrote:
k66 wrote:
Mrxyz wrote:Thanks. That was kind of my confusion also that the article talked about REIT and not about EM. So what did I miss(understand)?
I think Mr. Swedroe was reminding us that at least one of the common asset allocation elements has not done as well as other more spectacularly performing assets this past year. We might do well then to consider trimming some profit from our US Equities in order to bag some currently cheap Emerging Markets.
Thanks.

but again, I do no mean to offend. but if we do what you mentioned above is it market timing - which we are NOT supposed to do?
The difference between timing and rebalancing is perhaps whether or not you are acting according to preset rules or you are reacting only because of the price movement.

People will plan on rebalancing either at regular periodic intervals (annually for example) or when a particular fund moves outside a predetermined range.

Market-timers are acting purely according to one or more signals derived from price action - if not entirely on "gut instinct". Generally speaking, these systems won't be right-enough often-enough to make you better off than staying in full-time.

Perhaps the question is: If you do want to use market-timing signals to make adjustments to your portfolio, will you simply adjust to your desired AA or will you liquidate the asset entirely?
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