More funds = more "efficient" rebalancing?
More funds = more "efficient" rebalancing?
I was browsing the "lazy portfolios" page when I was wondering if portfolios there with more funds haven't an intrinsic advantage over the minimalist 2- or 3-fund portfolios. Let's say that bonds are split between shorter terms and longer terms, stocks between smaller cap and larger cap, and international between developed and emerging. Then, as/if these sub-classes of asset diverge, I will be able to rebalance between them, selling high the ones doing well and buying low the ones faring worse, something not possible if the sub-classes are consolidated into "total" funds. Make sense, bogus point-of-view, or is there some trade-off?
Re: More funds = more "efficient" rebalancing?
Think of the "total" funds as continuous rebalancing. Splitting will allow you to delay rebalancing. Whether that's good or bad depends on your rebalancing timing.lapuce wrote:I was browsing the "lazy portfolios" page when I was wondering if portfolios there with more funds haven't an intrinsic advantage over the minimalist 2- or 3-fund portfolios. Let's say that bonds are split between shorter terms and longer terms, stocks between smaller cap and larger cap, and international between developed and emerging. Then, as/if these sub-classes of asset diverge, I will be able to rebalance between them, selling high the ones doing well and buying low the ones faring worse, something not possible if the sub-classes are consolidated into "total" funds. Make sense, bogus point-of-view, or is there some trade-off?
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Re: More funds = more "efficient" rebalancing?
Rebalancing to what? What is it you are considering balanced?
Re: More funds = more "efficient" rebalancing?
Only a very good timing of rebalancing will improve the results of a 3-fund portfolio. Poor rebalancing timing will probably underperform a 3-fund portfolio.
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Re: More funds = more "efficient" rebalancing?
As mentioned, the total funds continuously rebalance. Slice and dice allows you to decide when and how much to rebalance - which may be good or bad, no one knows.
One advantage of slice and dice in a taxable portfolio is that is gives you more options to tax loss harvest.
One advantage of slice and dice in a taxable portfolio is that is gives you more options to tax loss harvest.
Re: More funds = more "efficient" rebalancing?
Every rebalancing study I have ever read says the benefits are at best tiny.
More "total" the fund the cheaper to run it including trading costs so in that sense fewer is likely better on that side of things.
Don't let this tail wag your dog.
More "total" the fund the cheaper to run it including trading costs so in that sense fewer is likely better on that side of things.
Don't let this tail wag your dog.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: More funds = more "efficient" rebalancing?
In addition to the excellent points made above, Bernstein has written in all of his books that the asset classes you want to hold (funds if you will) need to have a good amount of volatility and similar expected returns with lower correlations( to each other) wrt make rebalancing work robustly (at least that is my understanding) - so it is hard to find more than 3 or 4 asset classes that exhibit these traits. More than that - while rebalancing between all your options may seem like you have control - it is simply rearranging the chairs on a ship - not really adding much to what your overall return is going to be. In this respect, a simple 3 fund portfolio is actually not simple at all and does this work for you...
Re: More funds = more "efficient" rebalancing?
It depends upon whether you believe in a Rebalance Bonus or a Rebalance Penalty. Both are possible given right market conditions. I personally assume that rebalancing is return neutral so it does not matter from a return point of view - it matters only from a risk point of view.
Re: More funds = more "efficient" rebalancing?
What do you consider "efficient" rebalancing?lapuce wrote:More funds = more "efficient" rebalancing
I was browsing the "lazy portfolios" page when I was wondering if portfolios there with more funds haven't an intrinsic advantage over the minimalist 2- or 3-fund portfolios. Let's say that bonds are split between shorter terms and longer terms, stocks between smaller cap and larger cap, and international between developed and emerging. Then, as/if these sub-classes of asset diverge, I will be able to rebalance between them, selling high the ones doing well and buying low the ones faring worse, something not possible if the sub-classes are consolidated into "total" funds. Make sense, bogus point-of-view, or is there some trade-off?
1. The most efficient rebalancing tool - in accumulation - is an adequate *savings rate* (each person is free to define "adequate"). Savings rate (new money) can be used to help keep the portfolio balanced, as intended.
2. That said, rebalancing controls the overall risk (largely Equity:Fixed ratio). There is no evidence that rebalancing does anything else (certainly no "intrinsic advantage"). Perhaps you find this interesting.
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Re: More funds = more "efficient" rebalancing?
You seem to believe that rebalancing in itself will improve returns. A lot of people seem to think that, because of simplistic claims that it automatically results in "buying low, selling high." Like many simplistic explanations, it sounds as if it ought to work that way, but I am convinced that it does not. So is William J. Bernstein:
As to whether adding more funds helps, I haven't figure out a good way to present this, but the benefits of diversification are very nonlinear with correlation. Zero correlation, as with stocks and bonds in the long term, is meaningful. "It's not 1.00 so it must logically be helping at least a little" is very questionable. If you have a portfolio of four funds and you can find a fifth asset that has genuinely low correlations--not just by chance over some short period of time, but robust low correlation over long periods of time--and it has similar return to the existing assets--then it could be worthwhile. Splitting some fairly uniform asset class into two fairly similar parts is unlikely to do much.
Rebalancing only helps if there is mean reversion of the assets being rebalanced, over the time period over which rebalancing is done.William J. Bernstein wrote:Is there any reason to believe that, on average, rebalancing will help more than it hurts? Not if we believe that market movements are random. After all, we rebalance with the hope that an asset with past higher/lower than average returns will have future lower/higher than average returns.
Is this actually true? Probably. Recall that over short periods of time asset classes display momentum, but that over periods of time over a year or longer tend to mean-revert....
Rebalance your portfolio approximately once every few years; more than once per year is probably too often. In taxable portfolios, do so even less frequently.
As to whether adding more funds helps, I haven't figure out a good way to present this, but the benefits of diversification are very nonlinear with correlation. Zero correlation, as with stocks and bonds in the long term, is meaningful. "It's not 1.00 so it must logically be helping at least a little" is very questionable. If you have a portfolio of four funds and you can find a fifth asset that has genuinely low correlations--not just by chance over some short period of time, but robust low correlation over long periods of time--and it has similar return to the existing assets--then it could be worthwhile. Splitting some fairly uniform asset class into two fairly similar parts is unlikely to do much.
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Re: More funds = more "efficient" rebalancing?
Tanks for the many good points made here. Personally, I'll go with less rather than more funds, if only because simplicity always beats complexity when you don’t fully understand something! But I'll carry my argument a little further for the sake of the discussion. My understanding of rebalancing at its simplest is the following. Suppose that two assets, A and B, have the same long term value. Let's even say that they don't appreciate. However, they are subject to independent short term fluctuations. If I rebalance during these fluctuations, I'll make money, almost magically! It's actually a zero-sum game where the looser is the other party selling low/buying high. Now, as passive long term investors, we're not interested in that game. The point of rebalancing is to keep the same risk profile in the portfolio, as determined by the balance greater expected return/riskier vs. lower expected return/safer. Practically, it seems to boil dow just to stocks versus bonds. But, if we know that, within stocks, small caps have greater historical returns but are riskier than large caps (I actually don’t know if it’s true), isn’t there an argument for doing the same with respect to these sub-classes, with small caps/large caps playing the role of stocks/bonds within stocks? Or, if I believe that the long term perspective in international is that emerging markets have greater expected returns than developed markets (the emergence of the Chinese middle class, etc.), but are also more risky (political issues, etc.), can’t I treat the couple emerging/developed like the couple stock/bond, but within international?
Re: More funds = more "efficient" rebalancing?
Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
Re: More funds = more "efficient" rebalancing?
I would say it is inaccurate to say they continuously rebalance. Rather, they simply stay in balance without needing any buying or selling. The essence of rebalancing is selling what is overweight to buy what is underweight and that it not what happens in total cap weight funds.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: More funds = more "efficient" rebalancing?
Assume 2 regions in International (for discussion)... 75% developed and 25% emerging.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
If emerging goes up 10% and developed stays flat, the total international fund does nothing, new market weights are 72% developed and 28% emerging. Market weights are what the markets (buyers/sellers) want them to be.
When the fund receives new capital, it is invested per market weights whenever the funds invests the capital.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: More funds = more "efficient" rebalancing?
This is different than a fund that has a set ratio between developed and emerging. For example, you could have a fund that maintains a 75/25 ratio between developed and emerging. That fund could maintain that ratio by daily rebalancing - actively buying/selling. Vanguard's Target Retirement does daily rebalancing to maintain a fixed ratio between US and Int'l. They also maintain a semi-fixed ratio between bonds and stocks (they have a target ratio, but the target gradually gets more conservative over time).YDNAL wrote:Assume 2 regions in International (for discussion)... 75% developed and 25% emerging.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
If emerging goes up 10% and developed stays flat, the total international fund does nothing, new market weights are 72% developed and 28% emerging. Market weights are what the markets (buyers/sellers) want them to be.
When the fund receives new capital, it is invested per market weights whenever the funds invests the capital.
The beauty of a cap-based fund is that once it is set up you rarely need to worry about actively rebalancing. The market caps float automatically to whatever the market dictates. The only time you have to make an adjustment is when a stock enters or leaves your index. For example, if a US stock became a foreign stock. Or a stock becomes large enough that it enters the index. These things happen rarely, which is why cap-based funds are so efficient and can have such low costs.
Re: More funds = more "efficient" rebalancing?
Your hypothetical post, AFAIK, is not on topic with the question from OP nor my answer. That said, can you name a Total International fund as you hypothesize?... then perhaps we could discuss its virtues or pitfalls.rkhusky wrote:This is different than a fund that has a set ratio between developed and emerging. For example, you could have a fund that maintains a 75/25 ratio between developed and emerging.YDNAL wrote:Assume 2 regions in International (for discussion)... 75% developed and 25% emerging.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
If emerging goes up 10% and developed stays flat, the total international fund does nothing, new market weights are 72% developed and 28% emerging. Market weights are what the markets (buyers/sellers) want them to be.
When the fund receives new capital, it is invested per market weights whenever the funds invests the capital.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: More funds = more "efficient" rebalancing?
The logical extreme of this would be something like an "equal weight" index fund that attempts to own every stock and maintain them at equal weights by constantly rebalancing every stock.
I imagine a trading strategy that follows something like that works well when there is a lot of dispersion and mean reversion in the returns of various stocks, but at other times when the markets return is coming from a narrow group of stocks a momentum strategy that focuses more and more into those stocks growing the fastest would probably be better... but unless you can predict what sort of sequence of returns/style the market will look like over whatever future period you're invested I don't think any of these trading styles is worth ones salt.
The advantage of owning a single market-cap weighted total market fund is that it's a portfolio everyone can buy and hold without incurring any additional trading (and associated trading expenses). As a stock goes up in value it will correspondingly rise in weight of the portfolio relative to other stocks, and at the same time you'll continue to hold a weighting diversified into other stocks commensurate to the maximum diversification everyone in aggregate can hold. It doesn't require any trading to maintain a total market strategy in your equities, and when the prices of the entire market start getting high you can hedge those risks by rebalancing into bonds, or simply "buy and hold" without rebalancing at all and reap whatever so called "risk premium" the market puts on risks associated with holding at higher prices/momentum.
I imagine a trading strategy that follows something like that works well when there is a lot of dispersion and mean reversion in the returns of various stocks, but at other times when the markets return is coming from a narrow group of stocks a momentum strategy that focuses more and more into those stocks growing the fastest would probably be better... but unless you can predict what sort of sequence of returns/style the market will look like over whatever future period you're invested I don't think any of these trading styles is worth ones salt.
The advantage of owning a single market-cap weighted total market fund is that it's a portfolio everyone can buy and hold without incurring any additional trading (and associated trading expenses). As a stock goes up in value it will correspondingly rise in weight of the portfolio relative to other stocks, and at the same time you'll continue to hold a weighting diversified into other stocks commensurate to the maximum diversification everyone in aggregate can hold. It doesn't require any trading to maintain a total market strategy in your equities, and when the prices of the entire market start getting high you can hedge those risks by rebalancing into bonds, or simply "buy and hold" without rebalancing at all and reap whatever so called "risk premium" the market puts on risks associated with holding at higher prices/momentum.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: More funds = more "efficient" rebalancing?
I know of no fund that has a fixed developed/emerging ratio, but I do know of funds that have fixed US/Int'l ratios, which amounts to the same thing. I was simply pointing out that when speaking of rebalancing most people think of active rebalancing, not the automatic adjustment that occurs with a market cap fund.YDNAL wrote:Your hypothetical post, AFAIK, is not on topic with the question from OP nor my answer. That said, can you name a Total International fund as you hypothesize?... then perhaps we could discuss its virtues or pitfalls.rkhusky wrote:This is different than a fund that has a set ratio between developed and emerging. For example, you could have a fund that maintains a 75/25 ratio between developed and emerging.YDNAL wrote:Assume 2 regions in International (for discussion)... 75% developed and 25% emerging.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
If emerging goes up 10% and developed stays flat, the total international fund does nothing, new market weights are 72% developed and 28% emerging. Market weights are what the markets (buyers/sellers) want them to be.
When the fund receives new capital, it is invested per market weights whenever the funds invests the capital.
Re: More funds = more "efficient" rebalancing?
They also work well when smaller cap stocks do better than larger cap stocks, which in fact has been true historically for equal weight S&P 500 funds.JoMoney wrote:The logical extreme of this would be something like an "equal weight" index fund that attempts to own every stock and maintain them at equal weights by constantly rebalancing every stock.
I imagine a trading strategy that follows something like that works well when there is a lot of dispersion and mean reversion in the returns of various stocks, but at other times when the markets return is coming from a narrow group of stocks a momentum strategy that focuses more and more into those stocks growing the fastest would probably be better... but unless you can predict what sort of sequence of returns/style the market will look like over whatever future period you're invested I don't think any of these trading styles is worth ones salt.
The advantage of owning a single market-cap weighted total market fund is that it's a portfolio everyone can buy and hold without incurring any additional trading (and associated trading expenses). As a stock goes up in value it will correspondingly rise in weight of the portfolio relative to other stocks, and at the same time you'll continue to hold a weighting diversified into other stocks commensurate to the maximum diversification everyone in aggregate can hold. It doesn't require any trading to maintain a total market strategy in your equities, and when the prices of the entire market start getting high you can hedge those risks by rebalancing into bonds, or simply "buy and hold" without rebalancing at all and reap whatever so called "risk premium" the market puts on risks associated with holding at higher prices/momentum.
The issue is that one can do the same thing at less cost and greater diversity by simply adding a cap weight small cap fund to a plain vanilla S&P 500 fund or using a cap weight mid-cap fund.
Past threads have looked at this and from my admittedly shaky memory this has been the driving force, not rebalancing per se.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: More funds = more "efficient" rebalancing?
What is this "automatic adjustment" that occurs in a market cap fund? I am not aware of any adjustment (at least in a total market fund, some have size cutoffs for example). Indeed I thought one of the great attributes of cap weight funds is the fact they have no such adjustment which is why they have rock bottom turn over (especially total market cap weight funds) and thus rock bottom costs.rkhusky wrote:I know of no fund that has a fixed developed/emerging ratio, but I do know of funds that have fixed US/Int'l ratios, which amounts to the same thing. I was simply pointing out that when speaking of rebalancing most people think of active rebalancing, not the automatic adjustment that occurs with a market cap fund.YDNAL wrote:Your hypothetical post, AFAIK, is not on topic with the question from OP nor my answer. That said, can you name a Total International fund as you hypothesize?... then perhaps we could discuss its virtues or pitfalls.rkhusky wrote:This is different than a fund that has a set ratio between developed and emerging. For example, you could have a fund that maintains a 75/25 ratio between developed and emerging.YDNAL wrote:Assume 2 regions in International (for discussion)... 75% developed and 25% emerging.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
If emerging goes up 10% and developed stays flat, the total international fund does nothing, new market weights are 72% developed and 28% emerging. Market weights are what the markets (buyers/sellers) want them to be.
When the fund receives new capital, it is invested per market weights whenever the funds invests the capital.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: More funds = more "efficient" rebalancing?
Rebalancing is an act to maintain the same risk profile of the portfolio as originally planned. In this respect don't think there is a difference between 2 or 10 funds. The act of rebalancing itself is the important part.
Diversification benefit is the act of hoping by rebalancing that one can not only control the risk, but actually increase the return. It has been published numerous times the most important aspect to accomplish are: 1. Volatility and 2. Negative to low correlations. Many pooh pooh this notion, but I am not so sure. Most of the studies are done are usually flawed financial studies with methodology of: Put w money in a lump sum on x date and don't touch or add to it over y years and then take it all out on z date. I am sorry, but there are not many investors in real life that actually invest like that so I don't think many of the study designs mimics a real life investor. Since most in life invest a little bit each month I would think there is an increased chance of capturing diversification return if one is picking an asset allocation that have assets that are 1. volatile and 2. low/ negative correlation.
I don't think how many assets make a difference however. The lazy portfolio that has the MOST chance of diversification return would be the permanent portfolio which only has 4 assets. So the key is focusing on highly volatile and low/ no correlation asset classes.
Good luck.
P.s I do agree another advantage is TLH if that is important for you.
Diversification benefit is the act of hoping by rebalancing that one can not only control the risk, but actually increase the return. It has been published numerous times the most important aspect to accomplish are: 1. Volatility and 2. Negative to low correlations. Many pooh pooh this notion, but I am not so sure. Most of the studies are done are usually flawed financial studies with methodology of: Put w money in a lump sum on x date and don't touch or add to it over y years and then take it all out on z date. I am sorry, but there are not many investors in real life that actually invest like that so I don't think many of the study designs mimics a real life investor. Since most in life invest a little bit each month I would think there is an increased chance of capturing diversification return if one is picking an asset allocation that have assets that are 1. volatile and 2. low/ negative correlation.
I don't think how many assets make a difference however. The lazy portfolio that has the MOST chance of diversification return would be the permanent portfolio which only has 4 assets. So the key is focusing on highly volatile and low/ no correlation asset classes.
Good luck.
P.s I do agree another advantage is TLH if that is important for you.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle
Re: More funds = more "efficient" rebalancing?
Exactly what I said. When the market changes the weight for a stock, it is automatically adjusted in the cap weighted fund. There is no action required by the fund manager. There is no buying required to rebalance. There is no selling required to rebalance. The weight of the stock in the fund is automatically adjusted to the market weight instantaneously.Rodc wrote:
What is this "automatic adjustment" that occurs in a market cap fund? I am not aware of any adjustment (at least in a total market fund, some have size cutoffs for example). Indeed I thought one of the great attributes of cap weight funds is the fact they have no such adjustment which is why they have rock bottom turn over (especially total market cap weight funds) and thus rock bottom costs.
Re: More funds = more "efficient" rebalancing?
Since I am still accumulating, I can use new money to rebalance, in part. More funds means I've almost always got something doing poorly, so I can put my money there. In some sense I'm "buying low" relative to the choices available at the time I make the trade. I'm not sure it's more "efficient," but it does "automate" the decision process somewhat.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Re: More funds = more "efficient" rebalancing?
I guess I presume one does not rebalance something that is in balance. To me RE-balance implies by its very nature that something was in balance, got out of balance, then some actual action, in this case selling X to buy Y takes place to regain the balance. That is by definition you don't rebalance something that stay in balance all be itself. Rebalance, like repaint requires something to be done. So total market cap weight funds do not automatically REbalance, rather they stay in balance.rkhusky wrote:Exactly what I said. When the market changes the weight for a stock, it is automatically adjusted in the cap weighted fund. There is no action required by the fund manager. There is no buying required to rebalance. There is no selling required to rebalance. The weight of the stock in the fund is automatically adjusted to the market weight instantaneously.Rodc wrote:
What is this "automatic adjustment" that occurs in a market cap fund? I am not aware of any adjustment (at least in a total market fund, some have size cutoffs for example). Indeed I thought one of the great attributes of cap weight funds is the fact they have no such adjustment which is why they have rock bottom turn over (especially total market cap weight funds) and thus rock bottom costs.
I see you get this so in a sense I am preaching to the choir. I'm sure others above do as well.
But near as I can tell this is actually a point of confusion for some folks so I felt it was worth point out.
PS: just for grins I looked up one definition of rebalance.
http://www.investopedia.com/terms/r/rebalancing.asp
DEFINITION of 'Rebalancing'
The process of realigning the weightings of one's portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.
By that definition (and the others I saw) a total market cap weight fund does not rebalance, automatically or otherwise.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: More funds = more "efficient" rebalancing?
I concur.Rodc wrote: I guess I presume one does not rebalance something that is in balance.
Re: More funds = more "efficient" rebalancing?
JoMoney wrote:The logical extreme of this would be something like an "equal weight" index fund that attempts to own every stock and maintain them at equal weights by constantly rebalancing every stock. I imagine a trading strategy that follows something like that works well when there is a lot of dispersion and mean reversion in the returns of various stocks, but at other times when the markets return is coming from a narrow group of stocks a momentum strategy that focuses more and more into those stocks growing the fastest would probably be better... but unless you can predict what sort of sequence of returns/style the market will look like over whatever future period you're invested I don't think any of these trading styles is worth ones salt.
Agreed. Pushing the argument to its limit shows why it was probably not a good idea in the first place.
A convincing and negative answer to my question.The advantage of owning a single market-cap weighted total market fund is that it's a portfolio everyone can buy and hold without incurring any additional trading (and associated trading expenses). As a stock goes up in value it will correspondingly rise in weight of the portfolio relative to other stocks, and at the same time you'll continue to hold a weighting diversified into other stocks commensurate to the maximum diversification everyone in aggregate can hold. It doesn't require any trading to maintain a total market strategy in your equities, and when the prices of the entire market start getting high you can hedge those risks by rebalancing into bonds, or simply "buy and hold" without rebalancing at all and reap whatever so called "risk premium" the market puts on risks associated with holding at higher prices/momentum.
Re: More funds = more "efficient" rebalancing?
Indeed, finding such smaller asset classes is akin to stock picking. Do I believe I'm good at it?anil686 wrote:In addition to the excellent points made above, Bernstein has written in all of his books that the asset classes you want to hold (funds if you will) need to have a good amount of volatility and similar expected returns with lower correlations( to each other) wrt make rebalancing work robustly (at least that is my understanding) - so it is hard to find more than 3 or 4 asset classes that exhibit these traits.
Re: More funds = more "efficient" rebalancing?
You quoted my illustration to OP to confidently state:rkhusky wrote:I know of no fund that has a fixed developed/emerging ratio,......YDNAL wrote:Your hypothetical post, AFAIK, is not on topic with the question from OP nor my answer. That said, can you name a Total International fund as you hypothesize?... then perhaps we could discuss its virtues or pitfalls.rkhusky wrote:This is different than a fund that has a set ratio between developed and emerging. For example, you could have a fund that maintains a 75/25 ratio between developed and emerging.YDNAL wrote:Assume 2 regions in International (for discussion)... 75% developed and 25% emerging.lapuce wrote:Tfb, Chan_va or others: Can you expend a bit further what it means that total funds continuously rebalance? If, for instance, "total international" simply reflects the whole international market, and if "emerging" performs better than the rest of the fund, wouldn't its share of the fund simply grow ? Unless, by design, "total international" is structured with x% for "emerging", and the fund managers continuously rebalance to keep the same structure.
If emerging goes up 10% and developed stays flat, the total international fund does nothing, new market weights are 72% developed and 28% emerging. Market weights are what the markets (buyers/sellers) want them to be.
When the fund receives new capital, it is invested per market weights whenever the funds invests the capital.
For a moment, I thought perhaps there was some obscured fixed ratio (Developed/Emerging) fund out there.rkhusky wrote:This is different than a fund that has a set ratio between developed and emerging.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: More funds = more "efficient" rebalancing?
rkhusky wrote:I know of no fund that has a fixed developed/emerging ratio,......
Just because I don't know of a fund doesn't mean that there isn't one out there. But in any case, in my personal portfolio I maintain a fixed Developed/Emerging ratio. I get the Developed piece in my 401K and the Emerging piece in my IRA. Rather than trying to figure out what the current ratio is, I maintain a fixed ratio and rebalance to that.YDNAL wrote:For a moment, I thought perhaps there was some obscured fixed ratio (Developed/Emerging) fund out there.