[poll] Which rebalancing strategy do you use? And why?

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[poll] Which rebalancing strategy do you use?

I value average based on a value path.
3
3%
I value average based on a value path.
3
3%
I rebalance based on limits (either absolute or relative) without regard to time.
31
34%
I rebalance based on set period of time (semi-annually, annually, quarterly, monthly).
14
16%
I rebalance based on set period of time (semi-annually, annually, quarterly, monthly).
14
16%
I don't rebalance but adjust contributions only.
17
19%
I don't rebalance.
8
9%
 
Total votes: 90

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Eric White
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[poll] Which rebalancing strategy do you use? And why?

Post by Eric White »

I would like to understand how the "composite Boglehead" deals with rebalancing.

I would also like to understand the tradeoffs between the strategies. Please explain why you use the strategy you do and your perceived advantages/disadvantages of the competing strategies.

Thanks!
-Eric White
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asset_chaos
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Post by asset_chaos »

I use limits but I'm not so strict about time. I don't tally things more than every 6 months. And often I'm busy (or lazy) the month I "should have" checked rebalancing limits, so it might be 8 months or 4 months between checks. I'm fully aware that this means i could miss rebalancing opportunities. Asi es la vida. Also I use two limits that I call soft and hard with the hard limit greater than the soft. If something gets above the soft limit, I stop dividend reinvestment. The hard limits are much higher, but when the asset breaches that, I'll sell. The hard limit is set high enough that the risk reduction is notionally worth much more than the realized tax and transaction cost. The further complication is that I set the limits much narrower in tax-deferred accounts. I'm much more aggressive at rebalancing where the cost of doing it is essentially zero.

My method is definitely more complicated than it needs to be, but I set it up in a spreadsheet once so that whenever I input new data, the rebalancing decisions are just spit out according to the rules I specified: it's not much work.
Regards, | | Guy
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nisiprius
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Post by nisiprius »

I update the numbers on the spreadsheet I use to track my investments whenever I get around to it. Normally, this is several times a year, but when I get excited or nervous or making moves to prepare for retirement it can be more often than that.

I eyeball the numbers. If they're a little out of whack I adjust my contributions by some random amount that feels about right and see if they come back to my allocation over the next six months or so. In retirement I expect to do the same with withdrawals.

If they're a lot out of whack I make some mental calculation and transfer some random round number of dollars' worth, in the right direction.

What precise move I make is based on whim.

If I'm low on TIPS I'll wait for the next TIPS auction to do anything.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Robert T
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Rebalancing

Post by Robert T »

.
Which rebalancing strategy do you use? I use a rebalancing band (5x25 rule from Larry’s books). The table below shows how this translates into lower and upper bands. I pay attention to both asset class drift and factor exposure drift and check periodically. On only a few occasions has my allocation strayed past its upper and lower levels as I channel new inflows to underweighted asset classes on a quarterly basis (for ease of tax lot identification and to reduce trade costs). If rebalancing requires selling shares I consider the tax consequences, if large I may tolerate more drift. As portfolio size increases relative to new inflows the more difficult it will be to rebalance with new money so more sales to rebalance are expected in the future.

Why this approach? It focuses on maintaining a desired risk exposure and global diversification while paying attention to costs (ie. rebalancing is based on how far I stray from my targts). Once set up in a spreadsheet it is easy to monitor.

Code: Select all

REBALANCING TABLE
                                Target      Lower    Upper

ASSET CLASS			
US Equity                         37.5       32.5     42.5
Non-US Equity                     28.0       23.0     33.0
Emerging Market Equity             9.5        7.1     11.9
US Treasuries                     25.0       20.0     30.0

FACTOR EXPOSURE		
Value                              0.4       0.38     0.42
Size                               0.2       0.18     0.22
Robert
.
williamg
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Post by williamg »

I rebalance based on BOTH limits and a set period of time

Which is not one of your options. I use the Swedroe limits formula, but only check it quarterly after quarterly distributions.
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drjdpowell
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I don't rebalance

Post by drjdpowell »

I don't rebalance at all, though I do have to decide how to invest new money, so perhaps I rebalance subconsciously on a very slow timescale. I don't have a specific asset allocation to rebalance to, only a general one.

-- James
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White Coat Investor
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Post by White Coat Investor »

I use the 5/25 rule because I find due to the high ratio of contributions to balance that my allocation easily gets seriously out of whack multiple times a year. This causes me to rebalance more frequently than the typical time rebalancer. At the other end of the spectrum someone using the 5/25 rule would be rebalancing less frequently than someone doing annual rebalancing. The benefits of frequent rebalancing are better risk control. The benefit of infrequent rebalancing is you can take advantage of momentum.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
grayfox
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Post by grayfox »

None of the above.

I have a spreadsheet that shows the Target, Actual and difference. There is a top down hierarchy.

Code: Select all

Cash 0%

Stocks 40%
  US 60%
    US Stock Fund A
    US Stock Fund B
    ...
  International 40%
    Intl Stock Fund A
    Intl Stock Fund B
    ...

Fixed 60%
  Nominal 50%
    CDs
    Bond Fund A
    ...
  TIPS 50%
    Individual TIPS
    VIPSX
    ...
Whenever I have cash I look first to see how far the overall stock/fixed actual is from the target and think moving the cash to whichever is low. Then I look at the next level to see if money is needed in US or Intl for stocks or Nominal / TIPS for fixed.

However I don't always move into the low asset. For instance my TIPS actual is below target right now but I am not buying TIPS because the real rate is too low. I often try to direct the money into what I think is the best deal while maintaining the overall asset allocation.

The most important is the top level anyway. The further down the hierarchy you go the less important it becomes.

Also, I am not above adjusting the target allocation. For instance a year ago I was at 60% equities but over the past few months I moved down to 40% equities because I decided I could not take a 25 or 30% drawdown. This is already playing out. Today the market drawdown is about 15% but my 40/60 is down less than 5%. So I figure is the bear market reaches 30% drawdown I will be down 10% and if the market is down 45% I will be down less than 15%
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Sammy_M
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Great survey

Post by Sammy_M »

Great survey. I've been curious about this myself.

I have been reviewing my asset allocation quarterly and rebalancing with new money if possible. If not possible, I try to follow the 5/25 rule.

I do make exceptions for taxable accts. I will hold on longer if I have a ST gain. If the asset class that needs money is in a taxable account and has a loss position, I do it sooner (e.g., harvest the loss and add more to the replacement position.)
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Eric White
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Any reference materials with comparisons?

Post by Eric White »

Can anyone refer me to any reference materials (e.g. journal articles, academic papers, etc.) that do a decent job comparing all these strategies?

Most analysis I have seen only looks at time by itself but does not properly compare the strategies. The VA book seems to only compare VA with time-based rebalancing. Given that the majority of Bogleheads use limits only or contributions only, I would like to really understand this substantial difference.

Cheers,
Eric
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Judsen
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Post by Judsen »

Eric,
The "majority of Bogleheads" or at least "many Bogleheads" are not typical of the Total Stock Market Investors (TSMI).
We for the most part are reasoning, logical, cautious investors. As was noted a while back with a significantly higher % of INTJ personalities than the general population. That is a difference (not just this time) in us and the TSMI.
Cheers, Jud
BTW, I chose the second option. I rebalance based strictly on deviation % from set point (limits).
chaz
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Post by chaz »

Foe me, rebalancing is easy - done automatically by my Target Retirement fund.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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DRiP Guy
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Post by DRiP Guy »

I chose this response:

"I rebalance based on BOTH limits and a set period of time, whichever occurs first"

because it was the closest to my process, but that last clause is not what I do.

I simply know that my absolute AA is not critical, but I want to keep it in a range, so every January, take a look, and if it is not too far out of whack, leave it alone -- why incur trading costs? If it gets to far away, will balance back to exact nominal, but only come January.

Now, that last part "balance back to nominal" seems to be unusual based on what I've seen on the forums; many rebalancers say they will only rebalance half way back to target AA. Can someone tell me why that is? I imagine it is to avoid overshooting based on momentum changes, but to me, unless there are pendulum swings that are synced with my time frame (Jan annual rebalancing) I don't think it makes any more sense to stop short than it does to go right to the target. Interested to learn from others on this one...
grayfox
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Post by grayfox »

chaz wrote:Foe me, rebalancing is easy - done automatically by my Target Retirement fund.
The more I think about it I don't know why I bother to go through all the trouble of rebalancing, etc. when I could just use the Target Retirement Funds.

How often do the TR funds rebalance?
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DocHolliday
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Post by DocHolliday »

I rebalance annually when I finish filling my Roth in the first quarter of the year. The new Roth money goes towards my VG bond fund and I adjust my 401K and Roll-over IRA accordingly.

I have no desire to keep a close eye on my investments or worry about the AA being out of line by 5%. I go months without checking on my investments at times.
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Leif
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Re: Rebalancing

Post by Leif »

Robert T wrote:.

Code: Select all

REBALANCING TABLE
                                Target      Lower    Upper

ASSET CLASS			
US Equity                         37.5       32.5     42.5
Non-US Equity                     28.0       23.0     33.0
Emerging Market Equity             9.5        7.1     11.9
US Treasuries                     25.0       20.0     30.0

FACTOR EXPOSURE		
Value                              0.4       0.38     0.42
Size                               0.2       0.18     0.22
Robert
.
I have some similar stats from my spreadsheet, although I actually calculate for each sub-class as well, LB, LV, SB, SV, etc.

However, I don't have the factor exposure info. You say it is easy to calculate? Don't you need to download the Ken French data every month and then run a regression? If you have an easy way to do all this I sure would appreciate it if you could tell me how its done.

Regards,
Leif
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dlpmpls
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Post by dlpmpls »

I have two tax deferred accounts one I add new money monthly to and the other twice a month. Putting new money in the worst performing funds. I've gone about 7 years without having to sell from a fund that is up to a fund that is down.

Dan
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grabiner
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Exact annually, 5/25 for taxable

Post by grabiner »

I rebalance annually as close as possible to my target allocation, but I use the 5/25 rule to limit taxable effects; I will only pay capital-gains tax to rebalance if a class is off by more than 5% of my total, or a majorclass (US, foreign, real estate, bonds) is off by 25% of its own target, and normal inflows for the year won't fix the problem.
Wiki David Grabiner
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Sunny Sarkar
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Post by Sunny Sarkar »

There is no hard rule. It all depends. I have done all three of these:
I rebalance based on limits (either absolute or relative) without regard to time.
I rebalance based on set period of time (semi-annually, annually, quarterly, monthly).
I don't rebalance but adjust contributions only.
I look at my portfolio at year end and also when there is a big market movement over a short time (like now), and decide whether it needs rebalacing (off by 5%?). If it does, and if there is scope to rebalance by exchange without a tax hit, then I do that; otherwise I try to readjust future contributions - whatever works.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
unclemick
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Post by unclemick »

Soooo - after forty years of investing - I applied my own personal experience and did the right thing - full auto:

Target Retirement - auto rebalancing, auto asset selection as the clock ticks on, and auto deduct to MM checking cause I'm retired.

heh heh heh
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