LifeStrategy Equity Percentages below policy - any explanation?

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Cannibly
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LifeStrategy Equity Percentages below policy - any explanation?

Post by Cannibly »

I noticed that the equity percentages of Vanguard's LS funds are lower than the policy allocation as of 6/30/22. The Moderate Growth is at 58.29% equity instead of 60%, Growth is at 78.3% instead of 80%, even Income is at 18.3% instead of 20%. Anyone know why that is? One guess is that the funds have not been rebalanced to their standard allocation and the different allocations reflect the loss in Total US and Total International YTD, but that would seem strange to me. One of the pluses of these funds is that Vanguard does the rebalancing for you. LS Moderate Growth is our main holding.

Any other thoughts?
BitTooAggressive
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by BitTooAggressive »

It makes no sense to rebalance to exactly match some number from a trading cost perspective or performance perspective.

They will let it drift and eventually rebalance.
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by jebmke »

Noise level. < 2% is peanuts
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by pkcrafter »

Lifestrategy rebalancing:

On Reddit-- How often does Vanguard rebalance their index funds?

Answer from Vanguard:
We usually (adjust) daily cash inflows or outflows, along with any dividends received to ensure the fund is tracking the index closely. Therefore you could say that the fund is rebalanced daily to ensure it is holding the appropriate allocation of funds.
I hope this helps

Paul
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Topic Author
Cannibly
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by Cannibly »

Thanks everyone
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Cannibly
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by Cannibly »

Thanks everyone
sycamore
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by sycamore »

I posted some info about this topic in another thread:
sycamore wrote: Fri Mar 18, 2022 4:13 pm One question that comes up is how often do the LifeStrategy funds rebalance?

There's some helpful information in a recent Morningstar analysis called "Vanguard Names 2 Managers to LifeStrategy Target-Risk Series; Ratings Unchanged". It's behind a paywall but maybe your local library system has an online subscription (mine does).

Basically it says that before the volatility of 2020, the rebalancing policy allowed each holding to be up to +/- 75 basis points from the target. Beyond that, managers rebalance to get it down to +/- 50 basis points.

As of 2021, the limits are now +/- 200 basis points, and the rebalance action would get them down to +/- 100 points. The intent apparently was to reduce rebalancing frequency. Hopefully that will keep turnover lower, and any corresponding capital gains lower as well.

It's not stated explicitly in the analysis, but I speculate the managers may choose to rebalance even if the target is off by less than 200 points.
They use rebalancing bands. So some days they might rebalance and other days they won't.
mkc
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by mkc »

pkcrafter wrote: Thu Aug 04, 2022 3:05 pm Lifestrategy rebalancing:

On Reddit-- How often does Vanguard rebalance their index funds?

Answer from Vanguard:
We usually (adjust) daily cash inflows or outflows, along with any dividends received to ensure the fund is tracking the index closely. Therefore you could say that the fund is rebalanced daily to ensure it is holding the appropriate allocation of funds.
I hope this helps
That was a question about index funds.

Lifestrategy and Target Date funds are funds of funds, not index funds (just composed of them) so the answer from VG doesn't address the OP's question.
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by nisiprius »

The whole topic of rebalancing is fraught. I agree that I'm a little surprised to see LifeStrategy drifting even a couple of points off target, and a person could wonder what's going on... but that amount of drift isn't important in itself.

We need to separate two broad points of view on rebalancing. In the interest of clarity I will likely be oversimplifying. Theory 1 is "housekeeping chore to keep portfolio characteristics stable." Theory 2 is "actual benefit." Under theory 1, a drift from 60/40 to 58/42 isn't enough to matter. Under theory 2, the kind of almost-continuous rebalancing in a balanced fund doesn't provide the claimed benefit... and "wait for drift before rebalancing" is actually better.

1) Rebalancing is just a housekeeping chore to make sure that the characteristics of the portfolio--specifically how conservative or aggressive it is--doesn't drift too far with time. In this view, even the difference between 60/40 and 50/50 is hardly perceptible. The proof is that Vanguard only offers four funds. They believe that someone who wants 51/49 will find 60/40 close enough, and someone who wants 49/51 will find 40/60 close enough.

Using PortfolioVisualizer--I'll just use Total Stock and Total Bond to keep things simple--here's what the difference between 60/40 and 58/42 would have amounted to if sustained:

Source

Image

So we can be suspicious about what's going on if we have that sort of mind (I do), but the amount of drift isn't a serious concern in itself.

2) Rebalancing is very important because it improves portfolio performance by converting pure volatility into extra return. This is called the "rebalancing bonus." It is a form of market timing that actually works, because it forces us to buy low and sell high.

If you believe that, then daily or monthly rebalancing, or any close tracking of the target allocation, is actually counterproductive. In the short run, stocks exhibit momentum, so you do not want to be too quick to sell of portions of your winners, you want to let them run a bit. On the other hand, on time periods of around maybe two to five years, stocks exhibit some mean reversion. You want to take advantage of this by using rebalancing intervals that are long enough to capture some of that.

Investors who are trying to exploit this develop specific rebalancing strategies that intentionally do not use frequent rebalancing, but rebalancing according to (e.g.) "rebalancing bands." That is, they intentionally hold off on rebalancing until the allocation has drifted noticeably off target.

This was expressed by William J. Bernstein, who helped popularize the term "rebalancing bonus." The underlining is mine:
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.
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Topic Author
Cannibly
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Re: LifeStrategy Equity Percentages below policy - any explanation?

Post by Cannibly »

Thanks again for the replies. I've read Vanguard's piece on rebalancing, and their conclusion is similar to other posts in response to mine, that "more frequent rebalancing will limit the risk in a portfolio to a level suitable for the investment goal, but this potentially comes at the cost of lower
returns, increased turnover, and a heavier tax burden in the current period." So, there is potential upside in terms of return to less frequent rebalancing, letting the portfolio "drift". I paid closer attention to the LifeStrategy funds (at the 6/30/2022 fund composition update) to see what Vanguard does in "real life" so to speak. Drift they do.
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