Is rebalancing necessary for an all-stock portfolio?

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Fuweike
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Is rebalancing necessary for an all-stock portfolio?

Post by Fuweike » Sun Jan 04, 2015 10:08 am

Hi bogleheads,

I'm new to the forum but have been investing for several years. So far I have been "trading stocks," and have gotten lucky on some trades in the past five years or so (have also gotten very unlucky at times). Going forward I'm convinced of the traditional wisdom of buying Vanguard funds and never selling. I'm 28 and have a high income, and want to lock away some early investments so I can get things snowballing.

I am young and have a high risk tolerance, as long as I know that in the long run (10 to 20 years or more) I'm maximizing my returns. I am thinking of doing a 90% to 100% equity portfolio, perhaps 60% Vanguard total stock market index fund, 30% international fund, and 10% REIT. I plan to add new money to the Vanguard account once a month or two from my paychecks.

My question is: is rebalancing necessary if I have no bonds? I always see it in the context of re-aligning one's equity to bond ratio, but never between equities or index funds. Assuming I buy the index funds above, would I ever need to rebalance, or just keep buying more? The most I would do is perhaps casually look for market down days and do my new buys during those times.

Thanks all!

rkhusky
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by rkhusky » Sun Jan 04, 2015 11:15 am

Many keep a fixed US/Int'l ratio and therefore rebalance when that ratio gets too far from what is desired. Whether it is "necessary" or not is debatable. As stated, the stock/bond ratio is more important. There are some that advocate not even rebalancing between stocks and bonds. Whether that is prudent or not can only be determined in hindsight.

acegolfer
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by acegolfer » Sun Jan 04, 2015 11:26 am

As another poster said, it's debatable.

If you decide to rebalance your taxable account, try to minimize the tax. One suggested method in the past is using new contribution to reach your target ratios.

dbr
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by dbr » Sun Jan 04, 2015 11:34 am

Rebalancing is never necessary; it is just a question of the consequences of not rebalancing. Those consequences are that one may not have the asset allocation one intended to have as various asset classes develop different returns over time. For stock/bond allocation the issue is the overall risk of the portfolio. One would want to correct that if the portfolio becomes too risky as stocks outrun bonds in the long run, or one might want to correct that during a major downturn in stocks. Within the stock allocation one is trying to optimize some combination of asset classes. Logically it doesn't make sense to target a certain allocation if one is not going to rebalance to stay at that target. How far from target one might allow is a different question. That is why the 5/25 bands system has been proposed as a reasonable balance between being off target and making too many transactions. Of course, as observed by many, those adding contributions or making withdrawals can use those occasions to work the allocation closer to target.

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iceport
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by iceport » Sun Jan 04, 2015 12:14 pm

Well, re-balancing between assets with very different expected returns (equities vs. fixed income) often stabilizes risk at the expense of returns, as the assets with higher expected returns often outperform.

Within equities, which often have similar expected returns, my assumption would be that you are more likely to enjoy a re-balancing bonus. When you sell assets that have outperformed and buy assets that have underperformed, assuming a reversion to the mean, you should benefit. Obviously, there is no guarantee of that.

The big question is how frequently to re-balance...
"Discipline matters more than allocation.” ─William Bernstein

chaz
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by chaz » Sun Jan 04, 2015 12:30 pm

It's optional.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

conlius
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by conlius » Sun Jan 04, 2015 12:42 pm

I do, as I believe different equity funds hold different risk factors. I want 10-15% of my portfolio as REITs. If it goes above or below that, I rebalance. Same with Ex-US, US, Emerging Markets, etc. Will it help increase returns? Who knows...but it might help you sleep at night.

itstoomuch
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by itstoomuch » Sun Jan 04, 2015 12:53 pm

When you see an avalanche developing it may be best to prepare for it.
When you see an avalanche coming, it may be best to move out of the way.
When you are in the avalanche (me 2008) all you can do is swim and pray.
If you survive the avalanche, figure out what you learned from it.

IMO, Once a year is enough to rebalance. More important is to recognize the conditions for rebalancing.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

chaz
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by chaz » Sun Jan 04, 2015 1:04 pm

The Balanced Index fund is my choice.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

Fuweike
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by Fuweike » Sun Jan 04, 2015 2:24 pm

OP here, thanks for the advice everyone. New posters please feel free to comment.

I should have asked whether rebalancing is "advisable," not "necessary." Poor word choice on my part.

It sounds like it is a small concern in portfolio that is all equities and no bonds.

I think I will start off with roughly the allocation stated in my original post, then add money to each one with an eye towards keeping things balanced. I'll also plan to never sell, except perhaps to take advantage of possible tax loss harvesting, if any position should see a downturn. I may be able to lower the eventual tax bill when the time comes. I think I will check in on that yearly.

Thanks all for the advice. What a great community to give nice thoughtful answers. Please follow-up if you advise anything further for me. Thanks!

mnvalue
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by mnvalue » Sun Jan 04, 2015 2:27 pm

You should check for tax loss harvesting opportunities more frequently than yearly.

EarlyStart
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by EarlyStart » Sun Jan 04, 2015 3:31 pm

Fuweike wrote:OP here, thanks for the advice everyone. New posters please feel free to comment.

I should have asked whether rebalancing is "advisable," not "necessary." Poor word choice on my part.

It sounds like it is a small concern in portfolio that is all equities and no bonds.

I think I will start off with roughly the allocation stated in my original post, then add money to each one with an eye towards keeping things balanced. I'll also plan to never sell, except perhaps to take advantage of possible tax loss harvesting, if any position should see a downturn. I may be able to lower the eventual tax bill when the time comes. I think I will check in on that yearly.

Thanks all for the advice. What a great community to give nice thoughtful answers. Please follow-up if you advise anything further for me. Thanks!

I have an all equities, 100/0 allocation just because I'm so young (22). My written investment plan calls for no rebalancing.


I contribute new savings according to cost basis only. For example, my asset allocation in my brokerage (taxable) account is as follows:

75% Total US Market
25% Total Intl Market


So I'll give you a hypothetical example of how I contribute. Let's say that right now my cost basis is $74 in US Total Market and $26 in US Intl. The next dollar I contribute will go towards US Total Mkt even if the market values are: US Total Mkt: $80, Total Intl: $20. This is what I mean when I say I "contribute according to cost basis". This requires no judgement on my part and relieves me of the temptation to "time the market". Sometimes rebalancing between equity funds increases returns (selling high and buying low), and sometimes it decreases returns (selling winners and buying losers). You're only going to know whether it was "right" or "wrong" later on.



Try backtesting portfolios over different time periods with and without rebalancing. https://www.portfoliovisualizer.com/bac ... sisResults

Using my portfolio, 75% total US and 25% total intl, investing $1000/year from 2009-2013, you get a slightly better return without rebalancing. Rebalancing annually gives you an ending balance of 8479, whereas contributing according to cost basis in the way I described gives you an ending balance of 8499, just barely higher. Using 2000-2008, $1000 invested per year, the non-rebalancing portfolio is also just slight higher.

If you contributed $1000 the same way from 1973-1990, your ending balance for the rebalancing portfolio would be 133,504. The no-rebalancing portfolio would have an ending balance of 132,689. So in this case, rebalancing increased returns slightly. Will the next 10,20,30 years be more like the first couple of examples or more like this one? I have no idea.



Ultimately, rebalancing between equities may increase OR decrease returns. For most time periods, it's made a very small difference. The way I think of it is this: I have no idea whether rebalancing between equities will increase or decrease returns over the next 10 or 20 years, but more than likely, any difference will be pretty small. Therefore, it's not worth the headache, and I may as well just give myself the gift of not having to exercise judgement. This is what works for me, and others have their own distinct preferences. Nobody can tell you which is better because they don't have a crystal ball, but I thought I'd share my views on the subject since I am in a similar situation, being young and all equities.


Good luck, and remember: most of these little decisions hardly make any difference in the long run as long as you stay the course! :beer

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msi
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by msi » Sun Jan 04, 2015 6:02 pm

It's recommended for the sake of controlling risk, even in an all-equity portfolio. If you never rebalanced, you might end up overweighting Emerging Markets, Small Cap, or something riskier than your asset allocation intended.

Of course, it's completely optional because you may want that additional risk.

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nisiprius
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by nisiprius » Sun Jan 04, 2015 6:07 pm

William J. Bernstein wrote: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.
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.

staythecourse
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by staythecourse » Sun Jan 04, 2015 6:17 pm

If you have a high income usually one does not need to rebalance often anyways as new contributions usually will keep it within the usual 5% band range.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

itstoomuch
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by itstoomuch » Sun Jan 04, 2015 6:18 pm

itstoomuch wrote:When you see an avalanche developing it may be best to prepare for it.
When you see an avalanche coming, it may be best to move out of the way.
When you are in the avalanche (me 2008) all you can do is swim and pray.
If you survive the avalanche, figure out what you learned from it.

IMO, Once a year is enough to rebalance. More important is to recognize the conditions for rebalancing.
For nearly 30 years I had a 60/40 self balancing portfolio. In 2008, @58/62yo, I abandon the 60/40 for 90+/0/10- stock/bond/cash. Now that We are now 65/68yo, a recovered portfolio with less risk than the 2008- 60/40/0, I'm looking at All possible alternatives to our 90/0/10.

Use some "common sense." And always carry a Towel. :annoyed
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

lack_ey
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by lack_ey » Sun Jan 04, 2015 6:55 pm

With a "high income" I suppose at least part of the portfolio is in taxable.

IMHO rarely should you rebalance between equity types by selling anything in a taxable account. Taxes are a certainty (and any trading costs and frictions if applicable). You're unlikely to gain all that much in terms of risk mitigation or rebalancing bonuses over the long run by rebalancing between equities.

There's also the extra psychological and timing pressure of when to rebalance, not to mention regret—legitimate or not—if winners that get sold continue to do great.

Just try to keep things roughly in line with the new contributions. It's simple enough and may potentially be more optimal too.

Fuweike
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Re: Is rebalancing necessary for an all-stock portfolio?

Post by Fuweike » Sun Jan 04, 2015 7:47 pm

EarlyStart wrote:
Fuweike wrote:OP here, thanks for the advice everyone. New posters please feel free to comment.

I should have asked whether rebalancing is "advisable," not "necessary." Poor word choice on my part.

It sounds like it is a small concern in portfolio that is all equities and no bonds.

I think I will start off with roughly the allocation stated in my original post, then add money to each one with an eye towards keeping things balanced. I'll also plan to never sell, except perhaps to take advantage of possible tax loss harvesting, if any position should see a downturn. I may be able to lower the eventual tax bill when the time comes. I think I will check in on that yearly.

Thanks all for the advice. What a great community to give nice thoughtful answers. Please follow-up if you advise anything further for me. Thanks!

I have an all equities, 100/0 allocation just because I'm so young (22). My written investment plan calls for no rebalancing.


I contribute new savings according to cost basis only. For example, my asset allocation in my brokerage (taxable) account is as follows:

75% Total US Market
25% Total Intl Market


So I'll give you a hypothetical example of how I contribute. Let's say that right now my cost basis is $74 in US Total Market and $26 in US Intl. The next dollar I contribute will go towards US Total Mkt even if the market values are: US Total Mkt: $80, Total Intl: $20. This is what I mean when I say I "contribute according to cost basis". This requires no judgement on my part and relieves me of the temptation to "time the market". Sometimes rebalancing between equity funds increases returns (selling high and buying low), and sometimes it decreases returns (selling winners and buying losers). You're only going to know whether it was "right" or "wrong" later on.



Try backtesting portfolios over different time periods with and without rebalancing. https://www.portfoliovisualizer.com/bac ... sisResults

Using my portfolio, 75% total US and 25% total intl, investing $1000/year from 2009-2013, you get a slightly better return without rebalancing. Rebalancing annually gives you an ending balance of 8479, whereas contributing according to cost basis in the way I described gives you an ending balance of 8499, just barely higher. Using 2000-2008, $1000 invested per year, the non-rebalancing portfolio is also just slight higher.

If you contributed $1000 the same way from 1973-1990, your ending balance for the rebalancing portfolio would be 133,504. The no-rebalancing portfolio would have an ending balance of 132,689. So in this case, rebalancing increased returns slightly. Will the next 10,20,30 years be more like the first couple of examples or more like this one? I have no idea.



Ultimately, rebalancing between equities may increase OR decrease returns. For most time periods, it's made a very small difference. The way I think of it is this: I have no idea whether rebalancing between equities will increase or decrease returns over the next 10 or 20 years, but more than likely, any difference will be pretty small. Therefore, it's not worth the headache, and I may as well just give myself the gift of not having to exercise judgement. This is what works for me, and others have their own distinct preferences. Nobody can tell you which is better because they don't have a crystal ball, but I thought I'd share my views on the subject since I am in a similar situation, being young and all equities.


Good luck, and remember: most of these little decisions hardly make any difference in the long run as long as you stay the course! :beer

Thanks so much for the in depth response! It sounds like you've got it figured out. I think I will not worry too much about re-balancing, and instead just endeavor to buy as much of those funds as I can and never sell them. Closer and closer to my target . . . not letting things like re-balancing distract me from the real issue: how much do I have saved up?

Thanks again!

EarlyStart
Posts: 258
Joined: Thu Nov 20, 2014 9:36 pm

Re: Is rebalancing necessary for an all-stock portfolio?

Post by EarlyStart » Sun Jan 04, 2015 11:30 pm

Fuweike wrote:
EarlyStart wrote:
Fuweike wrote:OP here, thanks for the advice everyone. New posters please feel free to comment.

I should have asked whether rebalancing is "advisable," not "necessary." Poor word choice on my part.

It sounds like it is a small concern in portfolio that is all equities and no bonds.

I think I will start off with roughly the allocation stated in my original post, then add money to each one with an eye towards keeping things balanced. I'll also plan to never sell, except perhaps to take advantage of possible tax loss harvesting, if any position should see a downturn. I may be able to lower the eventual tax bill when the time comes. I think I will check in on that yearly.

Thanks all for the advice. What a great community to give nice thoughtful answers. Please follow-up if you advise anything further for me. Thanks!

I have an all equities, 100/0 allocation just because I'm so young (22). My written investment plan calls for no rebalancing.


I contribute new savings according to cost basis only. For example, my asset allocation in my brokerage (taxable) account is as follows:

75% Total US Market
25% Total Intl Market


So I'll give you a hypothetical example of how I contribute. Let's say that right now my cost basis is $74 in US Total Market and $26 in US Intl. The next dollar I contribute will go towards US Total Mkt even if the market values are: US Total Mkt: $80, Total Intl: $20. This is what I mean when I say I "contribute according to cost basis". This requires no judgement on my part and relieves me of the temptation to "time the market". Sometimes rebalancing between equity funds increases returns (selling high and buying low), and sometimes it decreases returns (selling winners and buying losers). You're only going to know whether it was "right" or "wrong" later on.



Try backtesting portfolios over different time periods with and without rebalancing. https://www.portfoliovisualizer.com/bac ... sisResults

Using my portfolio, 75% total US and 25% total intl, investing $1000/year from 2009-2013, you get a slightly better return without rebalancing. Rebalancing annually gives you an ending balance of 8479, whereas contributing according to cost basis in the way I described gives you an ending balance of 8499, just barely higher. Using 2000-2008, $1000 invested per year, the non-rebalancing portfolio is also just slight higher.

If you contributed $1000 the same way from 1973-1990, your ending balance for the rebalancing portfolio would be 133,504. The no-rebalancing portfolio would have an ending balance of 132,689. So in this case, rebalancing increased returns slightly. Will the next 10,20,30 years be more like the first couple of examples or more like this one? I have no idea.



Ultimately, rebalancing between equities may increase OR decrease returns. For most time periods, it's made a very small difference. The way I think of it is this: I have no idea whether rebalancing between equities will increase or decrease returns over the next 10 or 20 years, but more than likely, any difference will be pretty small. Therefore, it's not worth the headache, and I may as well just give myself the gift of not having to exercise judgement. This is what works for me, and others have their own distinct preferences. Nobody can tell you which is better because they don't have a crystal ball, but I thought I'd share my views on the subject since I am in a similar situation, being young and all equities.


Good luck, and remember: most of these little decisions hardly make any difference in the long run as long as you stay the course! :beer

Thanks so much for the in depth response! It sounds like you've got it figured out. I think I will not worry too much about re-balancing, and instead just endeavor to buy as much of those funds as I can and never sell them. Closer and closer to my target . . . not letting things like re-balancing distract me from the real issue: how much do I have saved up?

Thanks again!

No problem. I just think of it as a non-essential headache, but that's just what works for me. Good luck in your endeavors.

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