Rebalancing Question

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Kintora
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Rebalancing Question

Post by Kintora »

2020 has been my year for creating and refining my IPS as I learn more from this forum. My initial plan for rebalancing triggers is 5% plus/minus from AA is an immediate rebalance, and an annual rebalance on my birthday regardless of degree of drift from target AA.

The more I think about it, I would like to simplify my triggers to just use bands and not the annual rebalance. As long as I am comfortable with my portfolio AA fluctuating within the bands, I am wondering what the advantage really is to a forced annual rebalance as opposed to just letting the markets do their thing inside my bands.

Instead, I am thinking to just steer my portfolio towards desired AA with new contributions to lagging asset during working years and withdrawals from outperforming asset in retirement years, and only rebalance when/if I hit the plus/minus 5% thresholds.

Am I missing something here related to an annual rebalance that would improve the long term performance of my portfolio? Interested to hear some of your thoughts on this.

EDIT: Edited to clarify my triggers.
Last edited by Kintora on Fri Sep 04, 2020 10:24 pm, edited 2 times in total.
alex_686
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Re: Rebalancing Question

Post by alex_686 »

You are not.

Practically speaking there us not much difference between a annual rebalance and a 10% band.

5% is a bit tight for many individual investors and this year has been extreme. But generally not a huge deal.
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livesoft
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Re: Rebalancing Question

Post by livesoft »

Boglehead siamond just posted on some number crunching that he churned that you may wish to read:
https://www.bogleheads.org/blog/2020/08 ... us-part-1/
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sailaway
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Re: Rebalancing Question

Post by sailaway »

Hopefully someone else will come and post the link (hopefully that link that posted just before I hit send...), but there was a recent discussion that showed that the rebalancing method didn't really matter, just as long as you rebalance.

I fail to see how your system is more simple than an annual rebalance? You talk about forcing an annual rebalance, but it still only happens if it exceeds your bands. We actually do semi annual rebalancing, but haven't had to rebalance in over a year because the additions, subtractions and market changes balanced each other out in between the snapshots. We have a couple of more months to wait on the market to see what happens next.
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Kintora
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Re: Rebalancing Question

Post by Kintora »

alex_686 wrote: Fri Sep 04, 2020 8:49 pm You are not.

Practically speaking there us not much difference between a annual rebalance and a 10% band.

5% is a bit tight for many individual investors and this year has been extreme. But generally not a huge deal.
OK, thanks. To clarify, I mean that if my AA goes plus/minus 5% I rebalance. So, I guess that makes it a 10% band?
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Kintora
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Re: Rebalancing Question

Post by Kintora »

sailaway wrote: Fri Sep 04, 2020 8:54 pm I fail to see how your system is more simple than an annual rebalance? You talk about forcing an annual rebalance, but it still only happens if it exceeds your bands.
I am speaking of an annual rebalance where it is executed regardless of hitting a band or not. One where it would go, for example, from 82/18 to 80/20 if target AA is 80/20. By cutting out this type of annual rebalance and only watching my band, to me that makes it more simple in my mind. Thanks for your feedback, and I will check out that other discussion.
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Kintora
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Re: Rebalancing Question

Post by Kintora »

livesoft wrote: Fri Sep 04, 2020 8:54 pm Boglehead siamond just posted on some number crunching that he churned that you may wish to read:
https://www.bogleheads.org/blog/2020/08 ... us-part-1/
Thanks, I will take a look at this.
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Peter Foley
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Re: Rebalancing Question

Post by Peter Foley »

From a simplification standpoint, I see no real issue in redirecting contributions when you hit your 5% band. If you already have substantial savings it would seem prudent to include a once a year rebalance of accounts. The once a year rebalance would also offer one the opportunity to rebalance across a number of different accounts and may include tax loss harvesting. (I'm mainly thinking of stocks in Roth and bond allocation in tax deferred.)

The phrase "redirecting contributions" gives me the impression that one is redirecting biweekly or monthly contributions to a retirement account (tax deferred or Roth). That may not always be the case, but it is probably the approach of most investors who are still working.
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Re: Rebalancing Question

Post by Kintora »

Peter Foley wrote: Fri Sep 04, 2020 10:47 pm From a simplification standpoint, I see no real issue in redirecting contributions when you hit your 5% band. If you already have substantial savings it would seem prudent to include a once a year rebalance of accounts. The once a year rebalance would also offer one the opportunity to rebalance across a number of different accounts and may include tax loss harvesting. (I'm mainly thinking of stocks in Roth and bond allocation in tax deferred.)

The phrase "redirecting contributions" gives me the impression that one is redirecting biweekly or monthly contributions to a retirement account (tax deferred or Roth). That may not always be the case, but it is probably the approach of most investors who are still working.
I currently am working and contribute bi-weekly to my 401k. I max out my Roth IRA as well each year, but contribution timing varies for that. The way I am currently doing new contributions is to buy the lagging asset class, regardless if it has hit a band threshold or not, to always be steering my portfolio back towards my desired AA.

I see your point about an annual review/rebalance looking at stocks in Roth, bonds in tax deferred and TLH opportunities. Thanks for your feedback.
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Re: Rebalancing Question

Post by rkhusky »

Along with choosing the rebalancing band, you also need to determine how often you are going to check your AA. For me, computing my AA is the time consuming part. Doing the actual rebalance is easy. So, I generally rebalance whenever my AA is off by 1%. And I check every couple of weeks or whenever I hear about big moves in the market.
I also found that changing my contribution mix was more hassle than just contributing according to my AA and then rebalancing.
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Re: Rebalancing Question

Post by Elysium »

Re-balancing is not necessary. It is an overused term by FAs to show they are adding value. Use it very sparingly as a risk management method whenever the risk of the portfolio has increased beyond a certain level, with the trigger being very tolerant of deviations from baseline. For instance stocks have become between 5% and 10% away from target, with re-balancing done more closer to 10% than 5%.
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Re: Rebalancing Question

Post by Dandy »

seems reasonable. I would suggest using the annual date to review your overall situation and investment approach to make sure it still makes sense. Most times there should be no changes but it is easy to drift and as you get closer to retirement and/or your number. e.g. if you are 50 and have reached your number do you still need/want the same allocation? The same level of contributions? Is health or job security an issue? With historic low interest rates do you still want a lot of your cash in a money market fund?
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Re: Rebalancing Question

Post by alex_686 »

Kintora wrote: Fri Sep 04, 2020 10:01 pm
alex_686 wrote: Fri Sep 04, 2020 8:49 pm You are not.

Practically speaking there us not much difference between a annual rebalance and a 10% band.

5% is a bit tight for many individual investors and this year has been extreme. But generally not a huge deal.
OK, thanks. To clarify, I mean that if my AA goes plus/minus 5% I rebalance. So, I guess that makes it a 10% band?
No, I was referencing a +/- 10% band. It is what many individual investors use. I personally use a annual rebalance. Either works fine. In particular if we are talking about managing risk. Maybe not if we are trying to capture a rebalancing bonus.

Obviously the tighter and more frequent the better, but also more time consuming and expensive. There are those trading fees, even the implicit bid/ask spread. Is It worth the time and effort? It depends. Professionally I help to rehedge portfolios daily.
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Chip
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Re: Rebalancing Question

Post by Chip »

Since I do what you are proposing I not only think it's reasonable, I think it's brilliant. :D

At 60/40 I only rebalanced once on the downside in March, though I came within a whisker of a second rebalance. I still haven't rebalanced on the upside, though I'm close.
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racy
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Re: Rebalancing Question

Post by racy »

For your reading enjoyment here's a link to several articles on re-balancing from Michael Kitces blog, https://tinyurl.com/y36rsclf
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Re: Rebalancing Question

Post by dknightd »

Kintora wrote: Fri Sep 04, 2020 8:38 pm The more I think about it, I would like to simplify my triggers to just use bands and not the annual rebalance. As long as I am comfortable with my portfolio AA fluctuating within the bands, I am wondering what the advantage really is to a forced annual rebalance as opposed to just letting the markets do their thing inside my bands.

Instead, I am thinking to just steer my portfolio towards desired AA with new contributions to lagging asset during working years and withdrawals from outperforming asset in retirement years, and only rebalance when/if I hit the plus/minus 5% thresholds.
When I was working and accumulating I just threw money at the account. It re-balanced on my birthday. It was easy. They took care of it for me, I just had to keep working and contributing.

Now that I'm retired my outlook has changed, and I have more time to waste, but no more income. My plan going forward is to keep 5 years "safe" money. Some money in stocks that might grow. I rebalance my tax deferred accounts when stocks are out my band. I have my Roth accounts set to rebalance annually. I'm not looking to maximize anything but my happiness.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
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Re: Rebalancing Question

Post by Kintora »

rkhusky wrote: Sat Sep 05, 2020 6:46 am Along with choosing the rebalancing band, you also need to determine how often you are going to check your AA. For me, computing my AA is the time consuming part. Doing the actual rebalance is easy. So, I generally rebalance whenever my AA is off by 1%. And I check every couple of weeks or whenever I hear about big moves in the market.
I also found that changing my contribution mix was more hassle than just contributing according to my AA and then rebalancing.
I check my AA every 2 weeks on the weekend before my "pay week." I have a spreadsheet that makes the calculations pretty quick and easy. I kind of enjoy it actually. I do change my 401k contribution if the lagging asset class switches, but that only happens on occasion. Thanks for your comments.
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Re: Rebalancing Question

Post by Kintora »

Dandy wrote: Sat Sep 05, 2020 7:03 am seems reasonable. I would suggest using the annual date to review your overall situation and investment approach to make sure it still makes sense. Most times there should be no changes but it is easy to drift and as you get closer to retirement and/or your number. e.g. if you are 50 and have reached your number do you still need/want the same allocation? The same level of contributions? Is health or job security an issue? With historic low interest rates do you still want a lot of your cash in a money market fund?
I really like your idea of the annual date being an overall review as opposed to being a simple rebalance trigger, as my bands already serve that purpose. Seems like a good opportunity to take a look at the "big picture" and consider other adjustments or fine tuning if it makes sense to do so. Thanks.
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Re: Rebalancing Question

Post by Kintora »

alex_686 wrote: Sat Sep 05, 2020 8:33 am
Kintora wrote: Fri Sep 04, 2020 10:01 pm
alex_686 wrote: Fri Sep 04, 2020 8:49 pm You are not.

Practically speaking there us not much difference between a annual rebalance and a 10% band.

5% is a bit tight for many individual investors and this year has been extreme. But generally not a huge deal.
OK, thanks. To clarify, I mean that if my AA goes plus/minus 5% I rebalance. So, I guess that makes it a 10% band?
No, I was referencing a +/- 10% band. It is what many individual investors use. I personally use a annual rebalance. Either works fine. In particular if we are talking about managing risk. Maybe not if we are trying to capture a rebalancing bonus.

Obviously the tighter and more frequent the better, but also more time consuming and expensive. There are those trading fees, even the implicit bid/ask spread. Is It worth the time and effort? It depends. Professionally I help to rehedge portfolios daily.
Understood, and thanks for clarifying. Elysium seems to lean towards 10% as well and for the primary purpose of risk management. Rebalancing for me is primarily for risk management, but if there is a "sell high buy low" bonus baked in, that's great. Maybe that is debatable. For now, I will stick with 5%, but keep an eye on the factors you mention (time and expense). Thanks again.
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Re: Rebalancing Question

Post by Kintora »

Chip wrote: Sat Sep 05, 2020 8:42 am Since I do what you are proposing I not only think it's reasonable, I think it's brilliant. :D

At 60/40 I only rebalanced once on the downside in March, though I came within a whisker of a second rebalance. I still haven't rebalanced on the upside, though I'm close.
I rebalanced in March as well. It felt good to be doing something positive and productive at a time when there was a lot of negativity. :sharebeer
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Re: Rebalancing Question

Post by Kintora »

racy wrote: Sat Sep 05, 2020 9:14 am For your reading enjoyment here's a link to several articles on re-balancing from Michael Kitces blog, https://tinyurl.com/y36rsclf
Thanks for posting. I am checking it out.
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Re: Rebalancing Question

Post by Kintora »

dknightd wrote: Sat Sep 05, 2020 9:55 am I'm not looking to maximize anything but my happiness.
I like to think of my health and happiness as my most valuable assets, and I try to "invest" in those. Without them, the money doesn't mean a whole lot. Thanks for your comments.
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Re: Rebalancing Question

Post by flaccidsteele »

Kintora wrote: Tue Sep 08, 2020 10:46 pm
dknightd wrote: Sat Sep 05, 2020 9:55 am I'm not looking to maximize anything but my happiness.
I like to think of my health and happiness as my most valuable assets, and I try to "invest" in those. Without them, the money doesn't mean a whole lot. Thanks for your comments.
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Re: Rebalancing Question

Post by alex_686 »

Kintora wrote: Tue Sep 08, 2020 10:27 pm Rebalancing for me is primarily for risk management, but if there is a "sell high buy low" bonus baked in, that's great. Maybe that is debatable. For now, I will stick with 5%, but keep an eye on the factors you mention (time and expense). Thanks again.
FYI, it is not debatable, it is 'rock, paper, scissors'. I don't know if you want to go down this rabbit hole, but there are 3 different types of rebalancing strategies. A 'Convex' strategy, where you return to your AA, gives a rebalancing bonus when the markets are volatile and mean reverting. It trails a concave strategy like Constant Proportion Portfolio Insurance (CPPI) when the market has low volatility and is trend following.

For my day job, we hedge daily because we are very risk aware and semi-risk adverse. If you want to make money you have to take risks. You just have to decided on what risks you have skill and capacity in.
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