Rebalance how often? It's expensive
-
- Posts: 569
- Joined: Mon May 18, 2015 4:42 pm
Rebalance how often? It's expensive
It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
Re: Rebalance how often? It's expensive
1. I don't know, I will let others chime in. I believe there are stats that support re balancing and stats that don't support it. In the end, however, it is important to ensure asset allocation is within your desired targets. A portfolio can become too risky (stocks surge, thus increasing their allocation) or too conservative (market crash, thus reducing stock allocation). So even if one disagrees with rebalancing with the premise that it doesn't help returns, one will still need to rebalance to maintain asset allocation targets.ajacobs6 wrote:It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
2. Typically you will re-balance at a high level, meaning you are just tweaking your overall stock/bond ratio
3. You should be able to rebalance without needing to make transaction in your accounts that have fees. You can rebalance stock/bonds in a vanguard account such that your total stock/bond ratio among all accounts matches your desired AA.
Last edited by sharpjm on Mon Jul 13, 2015 3:15 pm, edited 2 times in total.
- Rick Ferri
- Posts: 9703
- Joined: Mon Feb 26, 2007 10:40 am
- Location: Georgetown, TX. Twitter: @Rick_Ferri
- Contact:
Re: Rebalance how often? It's expensive
Once every three years is adequate. The rest of the time, you can remain close by rebalancing using dividends, interest, deposits and withdrawals. Also, Schwab doesn't charge a commission to buy or sell their own ETFs.
Rick Ferri
Rick Ferri
Last edited by Rick Ferri on Mon Jul 13, 2015 3:17 pm, edited 1 time in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
-
- Posts: 11647
- Joined: Sat Oct 04, 2008 11:42 am
Re: Rebalance how often? It's expensive
If you're adding to your portfolio, direct the new money to the underweighted asset classes to bring you closer to your desired AA target.
Brokerages tend to have some ETFs commission free. Vanguard ETFs are commission free at Vanguard. Fidelity has a selection of iShares ETFs commission free. Schwab has some ETFs commission free. Are you holding your schwab ETFs at Schwab?
Brokerages tend to have some ETFs commission free. Vanguard ETFs are commission free at Vanguard. Fidelity has a selection of iShares ETFs commission free. Schwab has some ETFs commission free. Are you holding your schwab ETFs at Schwab?
- LAlearning
- Posts: 1365
- Joined: Wed May 09, 2012 12:26 pm
- Location: Los Angeles
Re: Rebalance how often? It's expensive
-- who recommended this arbitrary advice?ajacobs6 wrote:It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
--each etf and AA
--i would never re-balance if it cost me money. add new money somewhere else, or better yet, stop using services that cost money when free ones exist.
I know nothing!
Re: Rebalance how often? It's expensive
I Never rebalanced the first 30 years of investing.
I just tilted heavily towwards equities(90/10 stock bond) via steady purchases in retirement accounts and taxable account.
As I approached retirement about 5 years ago, I started to gradually "rebalance" with new cash and re-directing equity fund dividends and cap gains into bond investments.
I find myself glancing at the asset allocation number a couple of times a year now.
I just tilted heavily towwards equities(90/10 stock bond) via steady purchases in retirement accounts and taxable account.
As I approached retirement about 5 years ago, I started to gradually "rebalance" with new cash and re-directing equity fund dividends and cap gains into bond investments.
I find myself glancing at the asset allocation number a couple of times a year now.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
- whatusername?
- Posts: 641
- Joined: Wed Feb 18, 2015 5:08 pm
Re: Rebalance how often? It's expensive
I don't know the answer to your first question, but I'm sure someone does.
On the second one: you should rebalance so that your AA matches your IPS. How you specifically accomplish this - various ETFs across different accounts, for instance - isn't as important as the final result. Whatever will generate the least taxes and transaction costs to bring you AA back in line is what I would shoot for. Without more info on your portfolio, I can't tell whether this would mean each fund needs to be rebalanced or not (duplication across funds may reduce that need; a sliced/diced portfolio may increase it).
As far as when to rebalance to control expenses, every 6 months seems pretty narrow. If you're doing it based on time, 1 year is a general guideline though I would be hesitant to rebalance based on a time-based schedule if I had high transaction costs like you do relative to portfolio size. FWIW, I set my target AA and establish drift tolerances in my portfolio to trigger rebalancing - 5% is my general guideline. This may be too narrow for some people, but I'm okay with it and my transaction costs are low. YMMV.
If you're still making ongoing contributions, you could funnel them into lower performing assets to bring your AA closer to balance and reduce the need for/delay a full rebalance.
On the second one: you should rebalance so that your AA matches your IPS. How you specifically accomplish this - various ETFs across different accounts, for instance - isn't as important as the final result. Whatever will generate the least taxes and transaction costs to bring you AA back in line is what I would shoot for. Without more info on your portfolio, I can't tell whether this would mean each fund needs to be rebalanced or not (duplication across funds may reduce that need; a sliced/diced portfolio may increase it).
As far as when to rebalance to control expenses, every 6 months seems pretty narrow. If you're doing it based on time, 1 year is a general guideline though I would be hesitant to rebalance based on a time-based schedule if I had high transaction costs like you do relative to portfolio size. FWIW, I set my target AA and establish drift tolerances in my portfolio to trigger rebalancing - 5% is my general guideline. This may be too narrow for some people, but I'm okay with it and my transaction costs are low. YMMV.
If you're still making ongoing contributions, you could funnel them into lower performing assets to bring your AA closer to balance and reduce the need for/delay a full rebalance.
Re: Rebalance how often? It's expensive
+1 to Rick's advice.Rick Ferri wrote:Once every three years is adequate. The rest of the time, you can remain close by rebalancing using dividends, interest, deposits and withdrawals. Also, Schwab doesn't charge a commission to buy or sell their own ETFs.
Rick Ferri
From the research I've read you're probably best off doing it every couple of years as Rick suggested. You can probably find stats supporting rebalancing twice a year, but I haven't seen anything that show a significant benefit over other time frames, such as 1 or 2 years. If you're going to rebalance you might as well rebalance your overall stock allocation and your allocations among stocks and bonds (e.g., int'l vs US, nominal vs. real), but the suballocations will probably require less frequent rebalancing. I don't worry about exact percentages so if the amounts are off a few percent one way or the other I just let them ride. For instance, I have 74% in stocks and my target is 70%. I allow a +/-5% deviation from 70%, so until my stock allocation gets above 75% or drops below 65% I don't plan to do anything.
I would suggest you try to rebalance with new contributions so you don't have to sell anything. I do think it is prudent to consider costs and rebalancing bands. Find the cheapest way to rebalance and just funnel money into to the previous year's losers.
- Taylor Larimore
- Posts: 32839
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Wiki on "rebalancing."
ajacobs:
Our wiki has this article which should help answer your question:
Rebalancing
Best wishes.
Taylor
Our wiki has this article which should help answer your question:
Rebalancing
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Rebalance how often? It's expensive
If it is costing you money, you are likely approaching it wrong. If you don't figure it out from reading the responses and the Wiki, you might want to post your portfolio for specific advice. Hints:
The stock to bond ratio is the most important. The whole portfolio can often be rebalanced inside a 401k or 403b or whatever you have that does not have transaction fees.
You should consider buying stuff that does not have transaction fees in the first place. Buy Vanguard at Vanguard. Buy Schwab at Schwab. That should eliminate all transaction fees unless you have other brands as well. If you do, consider getting rid of them and replacing it with funds or ETFs that do not have a transaction fee.
You are wise to realize that these fees could ruin the productivity of your portfolio. Do something about it now rather than later when it will cost more.
The stock to bond ratio is the most important. The whole portfolio can often be rebalanced inside a 401k or 403b or whatever you have that does not have transaction fees.
You should consider buying stuff that does not have transaction fees in the first place. Buy Vanguard at Vanguard. Buy Schwab at Schwab. That should eliminate all transaction fees unless you have other brands as well. If you do, consider getting rid of them and replacing it with funds or ETFs that do not have a transaction fee.
You are wise to realize that these fees could ruin the productivity of your portfolio. Do something about it now rather than later when it will cost more.
Link to Asking Portfolio Questions
-
- Posts: 569
- Joined: Mon May 18, 2015 4:42 pm
Re: Rebalance how often? It's expensive
Thanks for the replies (especially Rick and Taylor, big fan!) I think rebalancing every 3 years would be awesome and very low maintenance. I like this approach.
And I'll use mostly new money coming in to buy the underperformers. That is an excellent idea.
As for the trading costs, I hold my Schwab ETFs at Vanguard, in my Roth IRA. Can I have multiple Roth IRAs from different websites? This would definitely help me cut down on fees from Schwab. I didn't realize I could do this...?
And I'll use mostly new money coming in to buy the underperformers. That is an excellent idea.
As for the trading costs, I hold my Schwab ETFs at Vanguard, in my Roth IRA. Can I have multiple Roth IRAs from different websites? This would definitely help me cut down on fees from Schwab. I didn't realize I could do this...?
Re: Rebalance how often? It's expensive
You can have Roth accounts at as many different companies as you want. It just makes for more bookkeeping but some people prefer not to have all there accounts with one company.ajacobs6 wrote:As for the trading costs, I hold my Schwab ETFs at Vanguard, in my Roth IRA. Can I have multiple Roth IRAs from different websites? This would definitely help me cut down on fees from Schwab. I didn't realize I could do this...?
-
- Posts: 11647
- Joined: Sat Oct 04, 2008 11:42 am
Re: Rebalance how often? It's expensive
If you have accounts at Vanguard, you should consider holding Vanguard ETFs which are commission free at Vanguard or Vanguard mutual fund shares. Vanguard admiral shares have the same low expense ratios as Vanguard ETFs.ajacobs6 wrote:As for the trading costs, I hold my Schwab ETFs at Vanguard, in my Roth IRA. Can I have multiple Roth IRAs from different websites? This would definitely help me cut down on fees from Schwab. I didn't realize I could do this...?
You can have IRA accounts at different vendors but you must be careful not to exceed the annual contribution limits for IRA. Vendor A won't know what you've contributed to IRAs at Vendor B. If all IRAs are at a given vendor, that vendor can tell you what you've contributed to that IRA and avoid excess contributions.
Re: Rebalance how often? It's expensive
+1Rick Ferri wrote:Once every three years is adequate. The rest of the time, you can remain close by rebalancing using dividends, interest, deposits and withdrawals. Also, Schwab doesn't charge a commission to buy or sell their own ETFs.
Rick Ferri
I also do asymmetric balancing - balance into bonds but never into equities. I am retired.
Kolea (pron. ko-lay-uh). Golden plover.
Re: Rebalance how often? It's expensive
Nobody has done a good enough study to publish stats. Every study that I have read is flawed.ajacobs6 wrote:It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
Did you read the bogleheads wiki on Rebalancing? It has great information and some useful external links.
My rules are:
1. One should not pay any commissions or costs to rebalance.
2. One should set up their portfolio so that they don't pay taxes to rebalance.
3. One's asset allocation should not be hard and fast. One only needs to be close where "close" is 5% or so to one's desired allocation.
4. Rebalance into an equity class on the lowest price of the year if you can.
5. Reblaance out of an equity class on the highest price of the year if you can.
6. Fixed income will mostly take care of itself, but don't forget to buy some when it drops and you are underweighted in fixed income.
Re: Rebalance how often? It's expensive
In your taxable accounts, do not automatically reinvest distributions and dividends. Sweep them to a cash account, then invest them manually to accomplish your asset allocation goals.
L.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Rebalance how often? It's expensive
You need to be careful how you rebalance so that it doesnt cost you money by paying taxes on the rebalancing - rebalancing in a retirement account that is tax deferred is easy since there will be no taxes due, but in a taxable account as some have suggested either stop reinvesting dividends or put new money into the asset category that is low; also consider selling shares that have a loss if in a taxable account.
-
- Posts: 569
- Joined: Mon May 18, 2015 4:42 pm
Re: Rebalance how often? It's expensive
Thanks all. Another question:
When rebalancing your stocks/bonds mix, should I care to go deeper? For example:
I'm 28% US Stocks, and 14% international stocks. Should I keep this balance also? That may take much more work, but may increase my return if I believe in this balance. Thoughts?
When rebalancing your stocks/bonds mix, should I care to go deeper? For example:
I'm 28% US Stocks, and 14% international stocks. Should I keep this balance also? That may take much more work, but may increase my return if I believe in this balance. Thoughts?
Re: Rebalance how often? It's expensive
My practice was actually to distill my desired AA down to percent of assets in each fund. That makes rebalancing easy.ajacobs6 wrote:Thanks all. Another question:
When rebalancing your stocks/bonds mix, should I care to go deeper? For example:
I'm 28% US Stocks, and 14% international stocks. Should I keep this balance also? That may take much more work, but may increase my return if I believe in this balance. Thoughts?
Now I just have it all in LifeStrategy Moderate which does the rebalancing for me.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Rebalance how often? It's expensive
You can have Roths at different places but why? Sell whatever Schwab stuff you have at Vanguard and replace it with Vanguard's ETFs. I seriously doubt that Schwab has anything that Vanguard can't do as well or better (but I don't know the entire Schwab list).ajacobs6 wrote:As for the trading costs, I hold my Schwab ETFs at Vanguard, in my Roth IRA. Can I have multiple Roth IRAs from different websites? This would definitely help me cut down on fees from Schwab. I didn't realize I could do this...?
So you have about 1/3rd foreign. Try to stay somewhere in the neighborhood of 33% but if it moves to 36% or 30% that is no reason for alarm. That's just normal market movement and does not need to be fixed. When you get to the point that fixing is needed, do it with new money - buy more international or less international than you have been.I'm 28% US Stocks, and 14% international stocks. Should I keep this balance also? That may take much more work, but may increase my return if I believe in this balance. Thoughts?
Again, none of this should be much trouble unless you just have an awkward portfolio. If you have an awkward portfolio, that's what you need to fix.
Link to Asking Portfolio Questions
- nisiprius
- Advisory Board
- Posts: 52105
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Rebalance how often? It's expensive
Au contraire, William J. Bernstein--who deserves some attention because he was partly responsible for popularizing the phrase "rebalancing bonus"--has written:ajacobs6 wrote:...It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?....
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.
- zaboomafoozarg
- Posts: 2430
- Joined: Sun Jun 12, 2011 12:34 pm
Re: Rebalance how often? It's expensive
Rebalancing is not expensive if you never rebalance in taxable. I just rebalance my 401k/IRA/Roth IRA while leaving the taxable account alone.
Note: rebalancing is harder if you try to minimize funds (for example, putting all your bonds in taxable, all your US stocks in 401k, and all your international stocks in IRA). That's why I try to hold US stocks + international stocks + US bonds in every account. Even though it means more overall funds, it makes rebalancing easier.
Note: rebalancing is harder if you try to minimize funds (for example, putting all your bonds in taxable, all your US stocks in 401k, and all your international stocks in IRA). That's why I try to hold US stocks + international stocks + US bonds in every account. Even though it means more overall funds, it makes rebalancing easier.
Re: Rebalance how often? It's expensive
I am sorry, but the good Dr. Bernstein (as quoted by nisiprius) is wrong on this one. In fact:nisiprius wrote:Au contraire, William J. Bernstein--who deserves some attention because he was partly responsible for popularizing the phrase "rebalancing bonus"--has written:ajacobs6 wrote:...It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?....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.
1. You choose an Asset Allocation because it is a proxy for risk and volatility.
2. You rebalance to maintain your chosen Asset Allocation.
Which part of this is too hard to understand?
No, we do not!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.
Rebalancing is not a momentum (market timing) strategy. Sure, you can put lipstick on the pig and rebalance with asymmetric bands, or only one way, and all the rest. That is just charting. You can hope that the market has cycles of some period, so that rebalancing every 18 months is better than rebalancing every 6 months. It's all horse puckey.
Choose an AA and maintain it within reasonable limits. You decide what is reasonable.
L.
Last edited by Leeraar on Mon Jul 13, 2015 9:14 pm, edited 1 time in total.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Re: Rebalance how often? It's expensive
Never rebalance. Market always seem to do it for me.
All the Best, |
Joe
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Rebalance how often? It's expensive
Hi ajacobs6,ajacobs6 wrote:It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
Are you adding new funds to your investment portfolio?
We do not sell any securities but rather direct new funds to the asset class that is underweight. This has worked very well and is easy.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Rebalance how often? It's expensive
One option is to set up a calendar rebalance. It is a simple method. Or you can do it by corridors.
When you set up your AA, set up corridors for each asset class. 2, 5, 10%, whatever. 5% is popular. When your AA breaches one of the corridors, rebalance all of your assets back so you are within your corridor.
The more expensive rebalancing is, the wider the corridor. Expense being either trading fees or taxes.
The more volatile the asset, the wider the corridor.
The more correlated the assets, the wider the corridor.
You can't set it and forget it – you need to visit your portfolio more often to make sure it is in the corridor. No magical dates for review. This requires a little more discipline. There is a temptation to play around with your portfolio.
When you set up your AA, set up corridors for each asset class. 2, 5, 10%, whatever. 5% is popular. When your AA breaches one of the corridors, rebalance all of your assets back so you are within your corridor.
The more expensive rebalancing is, the wider the corridor. Expense being either trading fees or taxes.
The more volatile the asset, the wider the corridor.
The more correlated the assets, the wider the corridor.
You can't set it and forget it – you need to visit your portfolio more often to make sure it is in the corridor. No magical dates for review. This requires a little more discipline. There is a temptation to play around with your portfolio.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Rebalance how often? It's expensive
Hi ajacobs6,
One additional option would be to present your investment portfolio to the forum to receive possibly more detailed and higher quality responses.
You may be able to select a simple and effective Target or LifeStrategy fund which rebalances for the individual investor.
Best.
One additional option would be to present your investment portfolio to the forum to receive possibly more detailed and higher quality responses.
You may be able to select a simple and effective Target or LifeStrategy fund which rebalances for the individual investor.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
- privatefarmer
- Posts: 779
- Joined: Mon Sep 08, 2014 2:45 pm
Re: Rebalance how often? It's expensive
I prefer rebalancing when assets drift by a certain percentage. Ie, for most equity classess, a drift of 20% in either direction would trigger a rebalance. But for emerging markets and I think international small cap, they are so volatile that I don't rebalance them unless they drift by at least 30%. This way, in theory, you would be rebalancing (hopefully) when the asset is either at a peak or trough which is the whole theory of rebalancing anyhow, right?ajacobs6 wrote:It's been recommended to me to rebalance twice a year. I have some questions:
1. Are there any stats supporting rebalancing twice a year?
2. Should I rebalance each fund or ETF to it's desired allocation? Or just fix the stocks/bonds ratio as a whole?
3. I own a few ETFs that are not Vanguard (I have a couple of Schwab, and muni bond ETFs). So the transaction fees would add up I think. If it's $7 per trade, that could be viewed as 1% for each $700 in added costs. That kind of ruins the low expense ratios I've aimed for.
Thanks in advance for the help.
Re: Rebalance how often? It's expensive
Your in good company, Jack hardly rebalances.joe8d wrote:Never rebalance. Market always seem to do it for me.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
- Maynard F. Speer
- Posts: 2139
- Joined: Wed Mar 18, 2015 10:31 am
Re: Rebalance how often? It's expensive
You can backtest portfolios with and without rebalancing over on Portfolio Vizualiser
https://www.portfoliovisualizer.com
Reduced volatility is obviously the more consistent payoff from rebalancing .. Returns are a little more surprising
With simple 3 and 4-fund portfolios, there seems to be about a 0.3% annual bonus from rebalancing .. With less conventional portfolios results can be a little different .. For example, Larry's Fat-Tails portfolio (70% in lower risk bonds), with rebalancing returns a reasonable 9.7% ... Without rebalancing, it returns a surprising 11.61%
https://www.portfoliovisualizer.com
Reduced volatility is obviously the more consistent payoff from rebalancing .. Returns are a little more surprising
With simple 3 and 4-fund portfolios, there seems to be about a 0.3% annual bonus from rebalancing .. With less conventional portfolios results can be a little different .. For example, Larry's Fat-Tails portfolio (70% in lower risk bonds), with rebalancing returns a reasonable 9.7% ... Without rebalancing, it returns a surprising 11.61%
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
- nisiprius
- Advisory Board
- Posts: 52105
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Rebalance how often? It's expensive
Ouch! That hurts! Because... I actually agree with you.Leeraar wrote:Au contraire, William J. Bernstein--who deserves some attention because he was partly responsible for popularizing the phrase "rebalancing bonus"--has written:nisiprius wrote:...1. Are there any stats supporting rebalancing twice a year?....I am sorry, but the good Dr. Bernstein (as quoted by nisiprius) is wrong on this one. In fact: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....
1. You choose an Asset Allocation because it is a proxy for risk and volatility.
2. You rebalance to maintain your chosen Asset Allocation.
Which part of this is too hard to understand?No, we do not!...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.
However, the important thing is that it doesn't matter, because either way it leads to the same conclusion. If you just are trying to maintain a stable risk profile, and if you accept that the "just noticeable difference" in risk is something like 20% in stock allocation--Vanguard thinks 80/20, 60/40, 40/60, 20/80 are enough to fit all risk tolerances closely enough--then you discover that you don't need to rebalance very often. Even during 1995-2000, once or twice would have done it.
If, on the other hand, you believe in trying to exploit mean reversion, then you still don't need to rebalance very often, because mean reversion occurs over time periods of around five years, and (in theory as presented by Dr. Bernstein) rebalancing much more often than every couple of years will actually start to run into momentum and hurt instead of help.
Either way, you don't need to do it more often than once every couple of years... if that.
Now as to whether there's anything in the mean reversion stuff, I don't have strong opinion. John C. Bogle's view is interesting. As I understand it--as he explains it in "The Telltale Chart"--he believes in it, but only in a nihilistic way. He doesn't believe it makes stocks safer than bonds in the long run. He doesn't believe you can exploit it by rebalancing. To him, it is just a good reason not to bother with any kind of tilt, because any apparent outperformance is likely to be short-lived and temporary.
The real baloney is the very seductive mental trap--the idea that frequent rebalancing is a magic kind of market timing that actually works, a mechanical formula that guarantees you an, automatic, incremental buy-low-sell-high boost, and manufactures extra return out of volatility. Like perpetual motion this stuff is genuinely hard to think clearly about, and it's really amazing how difficult it is to come to a meeting of the minds. Many people honestly believe that two random-walk assets, each with zero average return, will generate positive return provided you rebalance. I've convinced myself that this isn't so, but I've failed to convince others (and they've come perilously close to convincing me that I might be wrong! Fortunately, I know when to close my mind. )
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.
Re: Rebalance how often? It's expensive
Here are two charts for you. The first is a two-year chart of VTIAX and VEIEX which are total international stock market index fund and emerging markets index fund. Here is URL to play with a live chart.nisiprius wrote: If, on the other hand, you believe in trying to exploit mean reversion, then you still don't need to rebalance very often, because mean reversion occurs over time periods of around five years, and (in theory as presented by Dr. Bernstein) rebalancing much more often than every couple of years will actually start to run into momentum and hurt instead of help.
Either way, you don't need to do it more often than once every couple of years... if that.
Now as to whether there's anything in the mean reversion stuff, I don't have strong opinion. John C. Bogle's view is interesting. As I understand it--as he explains it in "The Telltale Chart"--he believes in it, but only in a nihilistic way. He doesn't believe it makes stocks safer than bonds in the long run. He doesn't believe you can exploit it by rebalancing. To him, it is just a good reason not to bother with any kind of tilt, because any apparent outperformance is likely to be short-lived and temporary.
The real baloney is the very seductive mental trap--the idea that frequent rebalancing is a magic kind of market timing that actually works, a mechanical formula that guarantees you an, automatic, incremental buy-low-sell-high boost, and manufactures extra return out of volatility. Like perpetual motion this stuff is genuinely hard to think clearly about, and it's really amazing how difficult it is to come to a meeting of the minds. Many people honestly believe that two random-walk assets, each with zero average return, will generate positive return provided you rebalance. I've convinced myself that this isn't so, but I've failed to convince others (and they've come perilously close to convincing me that I might be wrong! Fortunately, I know when to close my mind. )
One cannot see the recent dip in this chart between the resolution is not there. No data from 7/04/2015 to 7/09/2015 is plotted at all
Re: Rebalance how often? It's expensive
Here is the second chart with a shorter time period and daily resolution (not weekly). One can now see the 7% drop in the emerging markets index fund which was not shown in the previous chart.
Just because the first chart did not show the 7% dip does not mean it did not occur. So that's a dip and mean reversion in less than 7 days.
Folks will probably say, "OK, so what? No one could have taken advantage of such quick drop and recovery. And how would you know that the drop would not continue anyways? Stay-the-course! Rebalance when you are out of your bands or on your birthday!"
If you didn't look on July 8th, you would not even know if you were out of your rebalancing bands. And it is harder than that because if you only looked at your mutual fund NAVs after the market closed, you would not have been able to buy on July 8th with that information.
Just because the first chart did not show the 7% dip does not mean it did not occur. So that's a dip and mean reversion in less than 7 days.
Folks will probably say, "OK, so what? No one could have taken advantage of such quick drop and recovery. And how would you know that the drop would not continue anyways? Stay-the-course! Rebalance when you are out of your bands or on your birthday!"
If you didn't look on July 8th, you would not even know if you were out of your rebalancing bands. And it is harder than that because if you only looked at your mutual fund NAVs after the market closed, you would not have been able to buy on July 8th with that information.
Last edited by livesoft on Tue Jul 14, 2015 9:48 pm, edited 1 time in total.
Re: Rebalance how often? It's expensive
+1joe8d wrote:Never rebalance. Market always seem to do it for me.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Rebalance how often? It's expensive
This may simply be a question of irreconcilable dogmas.nisiprius wrote:Ouch! That hurts! Because... I actually agree with you.
I think the Bogleheads methodology is to reduce your investing strategy to some sort of mechanical prescription that you can follow, no matter what. Write your ISP, set your AA, rebalance, ... "Stay the course" is not an empty slogan. It is is an exhortation to stick with your plan, once you have one. It really is trying to minimize behavioral pitfalls.
nisiprius, we have both written on the phenomenon that investors underperform their investments. Why? In part, because they are tinkering with their plan. Dr. Bernstein said this at a Bogleheads conference a couple of years ago: It is more important to stick to your plan than it is to have the best plan.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")