What is your Re-balancing Trigger?

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bgyt
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What is your Re-balancing Trigger?

Post by bgyt » Wed Jul 17, 2019 1:47 pm

Can someone point me to a study/book or articulate how you have decided on the trigger that you use. I can't seem to find a good source to understand what the 'state of the practice' is for a re-balancing trigger.

I had hoped to find this in Ferri's 'Asset Allocation', but he just goes as far to say that a annual time-based trigger is the easiest method and although perhaps not optimal, is close to it.

I am leaning toward a +/-X% trigger, but have very little basis for that. And I know that the method is not as important as ensuring that it is automatic (no emotions), but I would still like to understand the pros/cons of different methods and trigger percentages.

dbr
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Re: What is your Re-balancing Trigger?

Post by dbr » Wed Jul 17, 2019 1:51 pm

Extensive analysis shows that there is no game to play here. Different procedures can have quite different results under different circumstances, but the circumstances can't be predicted ahead of time and compensate on average. Convenience is a good guide, and for that 5/25 as suggested by Larry Swedroe probably works well. If a person relates best to looking at investments on an annual basis or so, then maybe that is a good plan.

Note that the highest returns happen most of the time if one does not rebalance at all, so keep that perspective in mind if that is the path you get led down.

Aside from that here are 20,300 postings on Bogleheads discussing that question: https://www.google.com/search?sitesearc ... ebalancing
Last edited by dbr on Wed Jul 17, 2019 1:53 pm, edited 1 time in total.

dcabler
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Re: What is your Re-balancing Trigger?

Post by dcabler » Wed Jul 17, 2019 1:52 pm


MotoTrojan
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Re: What is your Re-balancing Trigger?

Post by MotoTrojan » Wed Jul 17, 2019 1:53 pm

bgyt wrote:
Wed Jul 17, 2019 1:47 pm
Can someone point me to a study/book or articulate how you have decided on the trigger that you use. I can't seem to find a good source to understand what the 'state of the practice' is for a re-balancing trigger.

I had hoped to find this in Ferri's 'Asset Allocation', but he just goes as far to say that a annual time-based trigger is the easiest method and although perhaps not optimal, is close to it.

I am leaning toward a +/-X% trigger, but have very little basis for that. And I know that the method is not as important as ensuring that it is automatic (no emotions), but I would still like to understand the pros/cons of different methods and trigger percentages.
A 5/25 absolute/relative is quite common. This would be a 5% absolute regardless of allocation (65/35 is nominal, rebalance at 59/41) or 25% of absolute (if you are 65/30/5 you'd rebalance at 65/28.7/6.3 due to 25% of 5% being 1.25%).

It can be whatever you want it to be so I wouldn't fret too much. Annual, 5/25, 10/25, quarterly, daily (like a target retirement fund) will all work out in the end. The longer you wait between rebalancing the higher your average allocation will be theoretically, since equities will outperform bonds on average and move your allocation higher.

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Cyclesafe
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Re: What is your Re-balancing Trigger?

Post by Cyclesafe » Wed Jul 17, 2019 1:56 pm

Vanguard paper on rebalancing

https://www.vanguard.com/pdf/icrpr.pdf
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livesoft
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Re: What is your Re-balancing Trigger?

Post by livesoft » Wed Jul 17, 2019 1:58 pm

I use a different trigger when rebalancing into equities than I do rebalancing out of equities.

I use the RBD method discussed often on this forum for rebalancing into equities.

I use a 3% to 5% above my nominal allocation to equities to rebalance out of equities.
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asif408
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Re: What is your Re-balancing Trigger?

Post by asif408 » Wed Jul 17, 2019 2:05 pm

I don't think the data on rebalancing strategies suggest any one method is infinitely superior, so my advice is do it with new contributions if possible, don't obsess about being 1 or 2% out of balance, and take advantage of the biggest disparities in performance to rebalance.

For instance, from Jaunary to August of last year several of my investments were down 20-40% while other parts were positive. I simply added to the ones that were down in August/September with new contributions. If I didn't have money to contribute I would have sold the winners and bought more of the losers. In 2017, everything I owned was up, so I took no action to rebalance. In many years there is not enough disparity in performance to warrant much action.

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Re: What is your Re-balancing Trigger?

Post by jebmke » Wed Jul 17, 2019 2:13 pm

Ours was +-5% pts around 40% equity -- so 35% on downside and 45% on the upside. Now I use -5% on downside and no upside trigger (no rebalance).
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Sandtrap
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Re: What is your Re-balancing Trigger?

Post by Sandtrap » Wed Jul 17, 2019 2:34 pm

+- 5% either way.
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Vulcan
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Re: What is your Re-balancing Trigger?

Post by Vulcan » Wed Jul 17, 2019 3:04 pm

Our portfolio is essentially a two-fund (Total World Stock + Total Bond) with rising bond glidepath up to 34 to 40% bonds (yet to be determined).

Stock portion therefore requires no rebalancing, and since I projected future glidepath under reasonable assumptions of returns (5% stocks, 2% bonds) and determined that with current contribution levels (more bonds than target bond allocation) it should roughly track the desired bonds glidepath without any need for rebalancing, I plan not to rebalance unless long term returns differ significantly from those above or there are significant changes in our ability to contribute.

If any of that occurs, our IPS calls for 5% bands when rebalancing with new contributions (or withdrawals in retirement phase) is not feasible.
Last edited by Vulcan on Wed Jul 17, 2019 5:11 pm, edited 1 time in total.
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Dandy
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Re: What is your Re-balancing Trigger?

Post by Dandy » Wed Jul 17, 2019 4:35 pm

I focus on the overall allocation vs worrying too much on sub allocations. I use 5% as a trigger. I feel free, on rare occasions, to rebalance within the 5%. e.g. on really bad market days I might buy some - after a really good run up I might sell some. Happens maybe every 2 or 3 years.

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Re: What is your Re-balancing Trigger?

Post by sschullo » Wed Jul 17, 2019 5:07 pm

Sandtrap wrote:
Wed Jul 17, 2019 2:34 pm
+- 5% either way.
5% is the general rule of thumb.
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vineviz
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Re: What is your Re-balancing Trigger?

Post by vineviz » Wed Jul 17, 2019 5:17 pm

dbr wrote:
Wed Jul 17, 2019 1:51 pm
Extensive analysis shows that there is no game to play here. Different procedures can have quite different results under different circumstances, but the circumstances can't be predicted ahead of time and compensate on average. Convenience is a good guide, and for that 5/25 as suggested by Larry Swedroe probably works well. If a person relates best to looking at investments on an annual basis or so, then maybe that is a good plan.
I agree totally.
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Ice-9
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Re: What is your Re-balancing Trigger?

Post by Ice-9 » Wed Jul 17, 2019 5:22 pm

I also use the Larry Swedroe 5/25 rule mentioned above.

It was pretty easy to set up conditional formatting in my asset allocation spreadsheet along the 5/25 rule so the cell is highlighted when rebalancing is needed. Happens in my portfolio maybe once every 2-3 years. (Except during 2008-9, when I needed to rebalance 3x within six months, and that was while consciously not looking at my portfolio for long spans.)

On my spreadsheet, one sheet allows me to input/update the number of shares of each fund, and Google Sheets calculates the balance using the Google Finance functions. A second sheet lists my asset allocation for the entire portfolio and adds up funds from different accounts into balances for each asset class from the funds on the first sheet. That's where the conditional formatting tells me if rebalancing is needed.

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Re: What is your Re-balancing Trigger?

Post by JediMisty » Wed Jul 17, 2019 5:29 pm

I use a relative +- 10% to rebalance. Like another poster, I use Google sheets and my spreadsheet shows calculates the balances and current allocations automatically. As my portfolio is close to 2mm, current contributions aren't enough to rebalance. I also direct dividends to my settlement account and purchase whatever is low. Additional rebalances are required as the stock market fluctuates, forcing me to sell high and buy low .....

livesoft
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Re: What is your Re-balancing Trigger?

Post by livesoft » Wed Jul 17, 2019 5:40 pm

dbr wrote:
Wed Jul 17, 2019 1:51 pm
Extensive analysis shows that there is no game to play here. ....
I guess some of us are lucky that some people did not get stopped by such statements. I'm thinking people like Black, Scholes, et al.

Hmmm, I wonder ... one always has the option of rebalancing, so how to price that?
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dbr
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Re: What is your Re-balancing Trigger?

Post by dbr » Wed Jul 17, 2019 5:44 pm

livesoft wrote:
Wed Jul 17, 2019 5:40 pm
dbr wrote:
Wed Jul 17, 2019 1:51 pm
Extensive analysis shows that there is no game to play here. ....
I guess some of us are lucky that some people did not get stopped by such statements. I'm thinking people like Black, Scholes, et al.

Hmmm, I wonder ... one always has the option of rebalancing, so how to price that?
Well, why not reference some of the work and people can more directly go read it? I am always ready to be corrected.

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Hector
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Re: What is your Re-balancing Trigger?

Post by Hector » Wed Jul 17, 2019 6:03 pm

I remember seeing study somewhere that rebalance is not necessary if your goal is to maximize the return. This make sense to me in accumulation phase:
-rebalance into bond using new money and dividend income
-rebalance into stock by selling bond when you are below in stock allocation of your overall AA.

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Re: What is your Re-balancing Trigger?

Post by Artsdoctor » Wed Jul 17, 2019 6:07 pm

livesoft wrote:
Wed Jul 17, 2019 5:40 pm
dbr wrote:
Wed Jul 17, 2019 1:51 pm
Extensive analysis shows that there is no game to play here. ....
I guess some of us are lucky that some people did not get stopped by such statements. I'm thinking people like Black, Scholes, et al.

Hmmm, I wonder ... one always has the option of rebalancing, so how to price that?
Very quick-witted. Working "Black-Scholes" into having an "option" of rebalancing is very subtle . . . Certainly made me chuckle.

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hdas
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Re: What is your Re-balancing Trigger?

Post by hdas » Wed Jul 17, 2019 6:16 pm

bgyt wrote:
Wed Jul 17, 2019 1:47 pm
Can someone point me to a study/book or articulate how you have decided on the trigger that you use.
This is a good reference.

I personally use VIX moves and expectations queries like this.

Cheers :greedy
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UpperNwGuy
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Re: What is your Re-balancing Trigger?

Post by UpperNwGuy » Wed Jul 17, 2019 7:08 pm

My trigger is the calendar. If it's January, it's time to determine if rebalancing needs to be done.

TravelforFun
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Re: What is your Re-balancing Trigger?

Post by TravelforFun » Wed Jul 17, 2019 7:22 pm

I don't rebalance per se. I keep about 10 years worth of expenses in bonds, the rest of my portfolio is in stocks. I do need to withdraw money from my portfolio annualy to live on and so when the market is good, I would sell some stocks and use that money; when the market is bad, I'd sell some bonds. This has worked well for me.

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scubadiver
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Re: What is your Re-balancing Trigger?

Post by scubadiver » Wed Jul 17, 2019 7:38 pm

UpperNwGuy wrote:
Wed Jul 17, 2019 7:08 pm
My trigger is the calendar. If it's January, it's time to determine if rebalancing needs to be done.
This is more or less what I do, with the exception of the 2008-2009 crash where I fortuitously rebalanced again on March 1st. I have no recollection of what my specific trigger was for that other than thinking, "Crap, the market sure has went down a lot. Guess I should rebalance again."

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Peter Foley
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Re: What is your Re-balancing Trigger?

Post by Peter Foley » Wed Jul 17, 2019 7:43 pm

I rebalance rarely. Since I do not slice and dice and only care about the ratio of equities to non equities, the 5% rule is sufficient. If you are in the 60/40 to 40/60 range in terms of AA, it takes a lot of market movement to hit the 5% mark.

Because our bond allocation is almost entirely in tax deferred, I do look at a tax adjusted AA about once a year.

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Re: What is your Re-balancing Trigger?

Post by pascalwager » Wed Jul 17, 2019 11:15 pm

I usually only re-balance when I make a fund change(s) to my portfolio, and I never re-balance my stock/bonds ratio--at least so far. I'm usually just conveniently returning my portfolio to a 50/50 domestic/foreign stocks ratio. If the stocks ratio reached 55/45, then I'd probably consider re-balancing.

grettman
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Re: What is your Re-balancing Trigger?

Post by grettman » Thu Jul 18, 2019 6:11 am

I’m probably doing it wrong but I don’t rebalance.

Never have.

I am 90/10. I have been investing since the mid-90s.

Again, I know I’m doing wrong but I just haven’t been convinced I should.

At least not now while I’m still accumulating.

Maybe when I retire I will.

dbr
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Re: What is your Re-balancing Trigger?

Post by dbr » Thu Jul 18, 2019 8:38 am

grettman wrote:
Thu Jul 18, 2019 6:11 am
I’m probably doing it wrong but I don’t rebalance.

Never have.

I am 90/10. I have been investing since the mid-90s.

Again, I know I’m doing wrong but I just haven’t been convinced I should.

At least not now while I’m still accumulating.

Maybe when I retire I will.
You may well have been rebalancing by contribution, which is certainly a recommended tactic. A person that started in 1995 at 90/10 and made no contributions and did not reblance would not be 90/10 today. IN 2003 and 2009 the portfolio would be the way it started, though. Most of the time the allocation to stocks would have gained on that to bonds.

It is a point that at 90/10 there is less reason to care.

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Re: What is your Re-balancing Trigger?

Post by ruralavalon » Thu Jul 18, 2019 9:41 am

bgyt wrote:
Wed Jul 17, 2019 1:47 pm
Can someone point me to a study/book or articulate how you have decided on the trigger that you use. I can't seem to find a good source to understand what the 'state of the practice' is for a re-balancing trigger.

I had hoped to find this in Ferri's 'Asset Allocation', but he just goes as far to say that a annual time-based trigger is the easiest method and although perhaps not optimal, is close to it.

I am leaning toward a +/-X% trigger, but have very little basis for that. And I know that the method is not as important as ensuring that it is automatic (no emotions), but I would still like to understand the pros/cons of different methods and trigger percentages.
Our asset allocation is 50/50 equities/fixed income.

The rebalancing bands are +/- 5%, so when either reaches 45% or 55%. Because of the way we take Required Minimum Distributions (RMDs) proportionally from all funds in my rollover IRA, that almost never happens.
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bgyt
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Re: What is your Re-balancing Trigger?

Post by bgyt » Thu Jul 18, 2019 11:17 am

Thank you all for your feedback. Specifically for the links to the Vanguard paper and the Swedroe material. Feeling really good about my +/- 5% bands now.
:sharebeer

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