rebalance at 3% change ok?

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riptide
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rebalance at 3% change ok?

Post by riptide »

I am new to index investing and very new to rebalancing. I have read the wiki and learned from others here about rebalancing. I see that you can rebalance at 5% change with assets such as equities/bonds. Is it ok to rebalance at 3% ?

I read you can re-balance at 2.5% with the tilts and smaller investments , but I am asking about the major stocks/bonds.

I see with all the volatility now and the drops in the stocks I am a little heavier now in my stocks to bonds ratio. I would like to transfer a bit into bonds from stocks. I have to admit seeing the stocks drop heavily the last several days of 2015 make me want to move shares to bonds, as they are the only thing that is gaining in my portfolio (Is this market timing or can I really rebalance now?)
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vital15
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Re: rebalance at 3% change ok?

Post by vital15 »

If stocks go down wouldn't rebalancing mean buying more stocks?
fposte
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Re: rebalance at 3% change ok?

Post by fposte »

riptide wrote:I am new to index investing and very new to rebalancing. I have read the wiki and learned from others here about rebalancing. I see that you can rebalance at 5% change with assets such as equities/bonds. Is it ok to rebalance at 3% ?

I read you can re-balance at 2.5% with the tilts and smaller investments , but I am asking about the major stocks/bonds.

I see with all the volatility now and the drops in the stocks I am a little heavier now in my stocks to bonds ratio. I would like to transfer a bit into bonds from stocks. I have to admit seeing the stocks drop heavily the last several days of 2015 make me want to move shares to bonds, as they are the only thing that is gaining in my portfolio (Is this market timing or can I really rebalance now?)
I'm not sure I'm following--the drops in stocks would have left you with a higher ratio of bonds to stocks, so to rebalance you'd be buying stocks. The last sentence makes it sound like you're not really talking about rebalancing, just buying in response to short-term volatility. That's not a good plan. So what's your AA, and what does your IPS say about rebalancing?
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riptide
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Re: rebalance at 3% change ok?

Post by riptide »

fposte wrote:
riptide wrote:I am new to index investing and very new to rebalancing. I have read the wiki and learned from others here about rebalancing. I see that you can rebalance at 5% change with assets such as equities/bonds. Is it ok to rebalance at 3% ?

I read you can re-balance at 2.5% with the tilts and smaller investments , but I am asking about the major stocks/bonds.

I see with all the volatility now and the drops in the stocks I am a little heavier now in my stocks to bonds ratio. I would like to transfer a bit into bonds from stocks. I have to admit seeing the stocks drop heavily the last several days of 2015 make me want to move shares to bonds, as they are the only thing that is gaining in my portfolio (Is this market timing or can I really rebalance now?)
I'm not sure I'm following--the drops in stocks would have left you with a higher ratio of bonds to stocks, so to rebalance you'd be buying stocks. The last sentence makes it sound like you're not really talking about rebalancing, just buying in response to short-term volatility. That's not a good plan. So what's your AA, and what does your IPS say about rebalancing?

AA is 70/30 70 stocks 30 bonds , now at 73 / 27
73 % stocks , 27 % bonds, I'm 3% off, and want to transfer 3% from stocks to bonds
Do I need to wait to 5% off is what I am asking

I have gained over the time with the stocks, and it looks like stocks may be in for a long volatile period, and drop I feel the safety of the bonds
I want to put a little more into bonds, or I can wait...
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john94549
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Re: rebalance at 3% change ok?

Post by john94549 »

Generally speaking, when stocks tank, you buy more (in a re-balance).

OK, just saw your recent post. The issue is: you didn't harvest your gains and get back to 70/30 "when the gettin' was good". Re-balancing means selling "stuff" on a roll, so to speak. Nothing wrong in harvesting gains in equities and plopping into bonds (or other fixed-income). Set a band, then "do it". I did exactly this in my "fun money" Schwab SEP-IRA account. When it got a bit out-of-whack (i.e., past my re-balancing band), I sold a tad. Who knows, this year, I might be buying on the way down.
Last edited by john94549 on Tue Jan 06, 2015 1:35 pm, edited 1 time in total.
staythecourse
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Re: rebalance at 3% change ok?

Post by staythecourse »

To answer your question Vanguard did a paper (sure you can google it) and looked at rebalancing techniques using a pure calendar method (daily, monthly, quarterly, and annual), band method (0%, 5%, 10%), and combination of calendar and bands. They looked at a ?60/40 I believe and looked back from ?1926 to the paper's publication (couple of years ago). All of this was compared to no rebalancing at all.

The results showed no real difference more then just rebalancing annual when bands are outside of 5%.

Interesting for the RBD/ Livesoft followers the continual rebalancing of 0% showed no improvement in risk or return from any of the others as well. So don't think there is any data to support RBD (buying on dips) either.

The only difference, of course, is the more you rebalance the more transactions you incur and thus costs (bid/ ask, commissions, etc...) which lowers overall return.

In the end I don't think there is any good data convincing enough to support more frequent then every 1-2 years with 5% bands.

Good luck.

p.s. Also keep in mind that there is short term momentum that you don't want to interfere with.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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k66
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Re: rebalance at 3% change ok?

Post by k66 »

riptide wrote: AA is 70/30 70 stocks 30 bonds , now at 73 / 27
73 % stocks , 27 % bonds, I'm 3% off, and want to transfer 3% from stocks to bonds
Do I need to wait to 5% off is what I am asking

I have gained over the time with the stocks, and it looks like stocks may be in for a long volatile period, and drop I feel the safety of the bonds
I want to put a little more into bonds, or I can wait...
Honestly, you can rebalance anytime you wish, for what ever reason strikes you. Make sure though that it absolutely is according to your plan of action (IPS) and not just some truant whim.

Larry usually has some useful thoughts on topics of interest to us. This is an example:

http://seekingalpha.com/article/2130243 ... d-the-hows

Reading between the lines though, I wonder if a reevaluation of your basic AA isnt in order. If, what I'm pretty sure most of the posters on this forum would consider to be minor whimpers in the market, are causing you some angst; then some additional reflection about expectations, needs, risk appetitte and controls are likely warranted.
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livesoft
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Re: rebalance at 3% change ok?

Post by livesoft »

staythecourse wrote:The results showed no real difference more then just rebalancing annual when bands are outside of 5%.

Interesting for the RBD/ Livesoft followers the continual rebalancing of 0% showed no improvement in risk or return from any of the others as well. So don't think there is any data to support RBD (buying on dips) either.

The only difference, of course, is the more you rebalance the more transactions you incur and thus costs (bid/ ask, commissions, etc...) which lowers overall return.
Nowadays, no one should pay any costs to rebalance. The bid/ask spreads are essentially zero (especially with mutual funds exchanged at NAV) and commissions are zero.

The rebalancing annually when outside of bands and the continual rebalancing of 0% is not the RBD strategy. Nor is RBD simply "buying on the dips". Only a very small subset of dips could be called RBDs. There were no RBDs for Total Stock Market in all of 2014 even though there were some pullbacks in TSM. Also, "rebalancing on RBDs" is not the same as "rebalancing only on RBDs."

It is certainly OK to rebalance at 3% if that is in your IPS.

It is also an interesting question: For those that didn't rebalance according to their IPS or maybe they were up to near a rebalancing band, but now see equities pulling back even though they are still above their nominal desired AA for equities, what should they do? Should they rebalance now back to nominal or what? I don't think anyone can predict the future, so they should do what they want to do. It's all part of the fun of being an investor. One has to take responsibility for their own actions and cannot ask for comfort in the advice of others. Furthermore, no one can be right 100% of the time, but they also are unlikely to be wrong 100% of the time.
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john94549
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Re: rebalance at 3% change ok?

Post by john94549 »

k66 wrote:
Honestly, you can rebalance anytime you wish, for what ever reason strikes you. Make sure though that it absolutely is according to your plan of action (IPS) and not just some truant whim.
I love the phrase "truant whim".
staythecourse
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Re: rebalance at 3% change ok?

Post by staythecourse »

livesoft wrote:The rebalancing annually when outside of bands and the continual rebalancing of 0% is not the RBD strategy. Nor is RBD simply "buying on the dips". Only a very small subset of dips could be called RBDs. There were no RBDs for Total Stock Market in all of 2014 even though there were some pullbacks in TSM. Also, "rebalancing on RBDs" is not the same as "rebalancing only on RBDs."
I do realize all of that. I don't want to sidetrack this thread, but would appreciate your data to support your RBD strategy. Is it based on published data or some data you looked into yourself? There was another paper which I will have to find which does look directly at buying on RBD similar to your strategy which showed no difference. I will try to find it, but it was mentioned on here when the paper was discussed about 1-2 years ago.

Good luck.
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Re: rebalance at 3% change ok?

Post by livesoft »

Here is Rodc's post about his RBD analysis:
http://www.bogleheads.org/forum/viewtop ... 0&t=129502

And the RBD trade noted in that thread was the 2nd lowest day in all of 2014 to buy the ticker bought.
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Re: rebalance at 3% change ok?

Post by stylebox »

staythecourse wrote:To answer your question Vanguard did a paper (sure you can google it) and looked at rebalancing techniques using a pure calendar method (daily, monthly, quarterly, and annual), band method (0%, 5%, 10%), and combination of calendar and bands. They looked at a ?60/40 I believe and looked back from ?1926 to the paper's publication (couple of years ago). All of this was compared to no rebalancing at all.
I was just reviewing this since it's linked in my investment policy statement.
Best practices for portfolio rebalancing (https://personal.vanguard.com/pdf/icrpr.pdf)
Best practices for portfolio rebalancing wrote:As a result, we conclude that a rebalancing strategy based on reasonable monitoring frequencies (such as annual or semiannual) and reasonable allocation thresholds (variations of 5% or so) is likely to provide sufficient risk control relative to the target asset allocation for most portfolios with broadly diversified stock and bond holdings.
Note that they aren't talking about returns but also risk and volatility. During some time periods in the study (1926-2009) the strategy that never rebalanced performed the best. But it ended up with 20% higher equities stake than the rebalancing options and was much more volatile. From 1989-2009 never rebalancing didn't do as well and also resulted in higher equities and higher volatility. I believe the authors are suggesting that rebalancing for returns only results in minor (if any) gains but is important for preserving the appropriate level of risk that you are comfortable with for your investment strategy.
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Re: rebalance at 3% change ok?

Post by staythecourse »

stylebox wrote:I believe the authors are suggesting that rebalancing for returns only results in minor (if any) gains but is important for preserving the appropriate level of risk that you are comfortable with for your investment strategy.
Thanks for attaching a link as I haven't looked at that paper for awhile.

I do remember the tables of the different techniques and thinking how weird it was that the volatility and returns were not that different for any of the options outside of a few situations the no rebalancing showed a little bit better return (as you nicely pointed out not unusual as it meant more equities in the end).

With a paper like that I am not sure why anyone would even think of rebalancing more often then that as this and other papers I have seen shows no real advantage. Not to steal the thread, but add to it maybe someone can link the reasoning Mr. Swensen of Yale fame is so die hard in liking daily rebalancing. He seems to have two feet on the ground so I am assuming he has some rationale, no?

Good luck.
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retiredjg
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Re: rebalance at 3% change ok?

Post by retiredjg »

riptide wrote:Is it ok to rebalance at 3% ?
You can rebalance at whatever point you want. But the market moves all the time. With a 3% band, you may find yourself rebalancing more often. It is not really necessary to stay right on target, just somewhere near your target.

Since you are new to this and since you are still trying to figure out just where you fit, I think a 3% band is fine. But do consider if you want to rebalance "early" because your stock to bond ratio is just a bit too high for your comfort level. If wandering up to 75% stocks worries you, maybe you should really be at 65% stocks using 5% bands. Or maybe you just want to be closer to your target than 5%. I don't know.

Put this question (why do I want 3% bands) on the list of things you need to figure out over time. The answer you come up with is not terribly important, but it is important that you know the answer.
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Re: rebalance at 3% change ok?

Post by afan »

Rebalancing at 5% seems pointless to me.

Remember, your asset allocation is based on some consideration of historical and projected risk and return properties of your higher and lower risk investments. These values are highly variable, and your estimates of them will be error prone at levels way higher than 5%. Rebalancing at 5% implies that you are really sure that, say, your 70% stock allocation is correct and 65 or 75 are wrong, given your risk tolerance, etc. But minimal changes in actual risk and reward, well within any precision you can achieve with your estimates, could easily make your "optimal" allocation 65 or 75, rather than 70.

Since the best allocation, and the actual risk, will be determined by the actual risk/return of the assets, which are noisy, I think people are fooling themselves when they pretend that their estimates are precise enough to adjust when allocation is off by 5%.

For the same reason, rebalancing at 3% seems even more pointless.

Rebalancing should be free with mutual funds in a tax advantaged space in a decent retirement plan. It could easily generate tax liability if done in a taxable account. To the greatest extent possible, I try to "rebalance" slowly with new investment money, rather than selling existing investments. For taxable, the rules almost force this. For tax advantaged, it reminds me that there is no need to rebalance fast, since the desired allocation was a only a very rough noisy guestimate in the first place.
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Re: rebalance at 3% change ok?

Post by Beth* »

You can rebalance whenever you want. Personally, I target my contributions to whichever investments are running below their target percentage and then once a year around my birthday I sit down and figure out if I need to do any more active rebalancing. In 2014, on my birthday, I did move some money from stocks to bonds because the stock market had done so well over the past year.

There is no one right rule. You should just do what works for you.
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Re: rebalance at 3% change ok?

Post by inbox788 »

afan wrote:Rebalancing at 5% seems pointless to me.

Remember, your asset allocation is based on some consideration of historical and projected risk and return properties of your higher and lower risk investments. These values are highly variable, and your estimates of them will be error prone at levels way higher than 5%. Rebalancing at 5% implies that you are really sure that, say, your 70% stock allocation is correct and 65 or 75 are wrong, given your risk tolerance, etc. But minimal changes in actual risk and reward, well within any precision you can achieve with your estimates, could easily make your "optimal" allocation 65 or 75, rather than 70.

Since the best allocation, and the actual risk, will be determined by the actual risk/return of the assets, which are noisy, I think people are fooling themselves when they pretend that their estimates are precise enough to adjust when allocation is off by 5%.

For the same reason, rebalancing at 3% seems even more pointless.

Rebalancing should be free with mutual funds in a tax advantaged space in a decent retirement plan. It could easily generate tax liability if done in a taxable account. To the greatest extent possible, I try to "rebalance" slowly with new investment money, rather than selling existing investments. For taxable, the rules almost force this. For tax advantaged, it reminds me that there is no need to rebalance fast, since the desired allocation was a only a very rough noisy guestimate in the first place.
In the grand scheme of things, it's pretty much indifferent, but I find it interesting that you oppose more frequent re-balancing with lower bands, yet simultaneously pursue a strategy that aims for continuous re-balancing. I'm not being critical, as I do something similar, but mainly for convenience, not performance. Costs to re-balancing include fees, but in tax advantaged accounts, may not incur any significant events, so the main cost is time and energy involved in keeping the balance. If a free mechanism to maintain a particular balance were available, I don't see the problem of taking advantage of it.

One reason less frequent re-balancing may be advantageous is due to many people having a greater than 50/50 stock/bond AA. Combined with roughly 70/30 equity/bond performance, the time the AA is above the desired AA is greater than the time below. I think the average AA with wider band is, the greater the time it's above the AA than below. It's no free lunch as true AA is really a bit higher than what most people think and risk is also slightly elevated.
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Re: rebalance at 3% change ok?

Post by livesoft »

In today's investing world, no one should be paying any fees to rebalance. One should avoid taxes, too, but fees are so easy to not pay that I would be surprised if more than 20% of the folks on the forum pay any commissions at all in any given year.

It turns out that taxes are are avoidable as well. For investments in a taxable account, the distributions are about 2% annually which is often enough to get back into balance. Tax-loss harvesting gives one some room for realizing capital gains, too.

So when it comes to rebalancing, I think fees and costs are just red herrings that one really does not need to worry about.
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Re: rebalance at 3% change ok?

Post by beyou »

Does not matter if this is in the IPS already, the question is what should be in the IPS ?

I personally continuously re-balance via dividend reinvestment to the funds that need more
allocation, and via external contributions in a similar manner. Try not to buy/sell too often,
but in the end you do need to have some threshold as you are asking. I think 3% is a bit too low,
but if you can re-balance without paying taxes (most assets in 401k let's say or lots of losses to
offset gains) then no harm in a lower threshold. I just prefer to keep the transactions to a minimum,
for reduced record keeping, minimal transactions to report on my taxes, due to limitations of # 401k
transactions I can execute in my plan and more reasons. A wider band helps to reduce activity,
and I agree with above statements about even a wider band. The expected return and risk
differences between 60 or 65% stock allocation is a very small difference historically.
So why have tiny bands ?
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Re: rebalance at 3% change ok?

Post by john94549 »

I still love the phrase "truant whim". Of all the things garnered from this site today, the phrase "truant whim" will linger.

I shall now accuse the wife of a "truant whim" whenever I please. And she will have no idea of what I am speaking.

Wife: "You didn't take out the garbage." Me: "but an errant and truant whim". Wife: "huh?" Me: "You were but a truant wife, on a whim, and thus, failed to notice. A truant whim, as it were." Wife: "OK, enough Shakespeare, take out the garbage."
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k66
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Re: rebalance at 3% change ok?

Post by k66 »

Rock the Whim, John, Rock the Whim!

Quick: check and see if you can get the personalized plates too 8-)
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Re: rebalance at 3% change ok?

Post by rkhusky »

Rebalancing at 3% is perfectly fine. Rebalancing is so easy and painless to do in my tax advantaged accounts that I rebalance at 1%. I forgo some "momentum" or "rebalancing bonus", but I reduce my stress by making more frequent but smaller transactions.
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Re: rebalance at 3% change ok?

Post by afan »

inbox.

A misunderstanding, I suppose. I do not follow a policy of continuous rebalancing.
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Re: rebalance at 3% change ok?

Post by Ged »

I think it's a good idea to establish a schedule for rebalancing to help avoid untoward influence from pernicious truant whims. Personally I do it in October and April if an allocation is more than 3% different than plan. I think that's plenty, if not excessive.
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Re: rebalance at 3% change ok?

Post by steve r »

Ged wrote:I think it's a good idea to establish a schedule for rebalancing to help avoid untoward influence from pernicious truant whims. Personally I do it in October and April if an allocation is more than 3% different than plan. I think that's plenty, if not excessive.
I think 3 percent is fine.

For me, following my whims is a factor that helps me stay the course. It is somewhat hard to explain and certainly involves some psychology. If stocks seem pricy ... I sort of like the idea of selling a small amount of them. Once done, it cannot be undone for something like 3 months with my accounts... but that is usually not a problem -- my whims are not excessive. Hard to test this because it does not follow a strictly mechanical logic. My track record is mixed. I sold bonds near low yields (yeah :happy ). Another time I sold stocks and saw the market tank for days (yeah :happy ) only to recover (ahhh :( ) ... but even then, the yeah/ahhh is mixed as I still hold stocks -- I guess I want to prove my whim correct. When I am thinking clearly I am a firm believer in not trying to time the market based ... but that said ... I get these whims. Each time it was definitely a whim but seems to prevent me from tinkering more severely.

***
Find what works -- and stick with it. It is not likely to matter much ... per Vanguard article ... after all, we are talking a fraction of your overall portfolio ... and with that fraction -- your timing may be good or bad -- and that is unpredictable and is likely a random walk. Annually, every six months, automatically (Fidelity sets this up) ... when bands kick in ... really bad days .... or even based on whim if not excessive .... whatever works and stick with it.
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