I'm just going to leave this here... [Should you rebalance your portfolio?]

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Nick341981
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I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby Nick341981 » Wed Jan 11, 2017 6:27 pm

And watch as bogleheads begin to explode with rage. Let me get my popcorn ready. :mrgreen:



https://www.washingtonpost.com/news/bus ... b6267e4743

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Rebalancing? Yes or No

Postby sport » Wed Jan 11, 2017 6:32 pm

Whether or not to rebalance has been discussed at length previously on Bogleheads. There is nothing new here.
OP, it would be polite to have a Subject Line for this thread that describes its content better.

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Re: I'm just going to leave this here...

Postby boglephreak » Wed Jan 11, 2017 6:33 pm

i dont see what you think is controversial about that.

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Re: I'm just going to leave this here...

Postby stemikger » Wed Jan 11, 2017 6:36 pm

Why would Bogleheads head's explode? John Bogle is not a fan of rebalancing either. If anything, he advises no more than once a year and he doesn't rebalance his own money.
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Nick341981
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Re: I'm just going to leave this here...

Postby Nick341981 » Wed Jan 11, 2017 6:36 pm

Are there other mainstream articles out there talking about the folly of rebalancing that I missed?

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Re: I'm just going to leave this here...

Postby stemikger » Wed Jan 11, 2017 6:37 pm

boglephreak wrote:i dont see what you think is controversial about that.


+1 lol. I know.

I was getting ready to read something real controversial. This is old news and you are still a boglehead if you don't rebalance often.
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Re: I'm just going to leave this here...

Postby livesoft » Wed Jan 11, 2017 6:37 pm

Well, I'm just going to leave this here, too:

You have probably seen the hearsay that Fidelity did a study and found that investors who had died and thus no transactions for awhile had the best returns. This article is reminiscent of that, but ...

No! No! No! That's not the study that Fidelity actually did. I have a friend that works at Fidelity and she says Fidelity folks are amused by this "mix-up." Fidelity did do a study, but they found that the accounts that had the best performance were the one's where the advisor had died and not the client. One can understand why this study has never been officially released.
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Re: I'm just going to leave this here...

Postby ThankYouJack » Wed Jan 11, 2017 6:41 pm

Nick341981 wrote:And watch as bogleheads begin to explode with rage. Let me get my popcorn ready. :mrgreen:



https://www.washingtonpost.com/news/bus ... b6267e4743


Rage because I just wasted my time looking at a junk article? :mrgreen:

I just skimmed it, basically stopped reading after the "This could change..." part

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Re: I'm just going to leave this here...

Postby Nick341981 » Wed Jan 11, 2017 6:42 pm

It is extremely interesting to say the least that a forum named after Jack Bogle doesn't even take his advice as far as rebalancing and international exposure goes. At best it's 50/50 here. There is definitely a hardcore group of "3 funds and rebalance as soon as I hit my bands" group running around.

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Re: I'm just going to leave this here...

Postby ThankYouJack » Wed Jan 11, 2017 6:44 pm

Nick341981 wrote:It is extremely interesting to say the least that a forum named after Jack Bogle doesn't even take his advice as far as rebalancing and international exposure goes. At best it's 50/50 here. There is definitely a hardcore group of "3 funds and rebalance as soon as I hit my bands" group running around.


I'd say most on here want to invest in low cost index funds and "stay the course". But I wouldn't say that everyone on here needs to follow everything that Mr. Bogle says or does.

Are you trolling us? :)

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby LadyGeek » Wed Jan 11, 2017 6:47 pm

I retitled the thread.

livesoft wrote:Well, I'm just going to leave this here, too:

You have probably seen the hearsay that Fidelity did a study and found that investors who had died and thus no transactions for awhile had the best returns. This article is reminiscent of that, but ...

No! No! No! That's not the study that Fidelity actually did. I have a friend that works at Fidelity and she says Fidelity folks are amused by this "mix-up." Fidelity did do a study, but they found that the accounts that had the best performance were the one's where the advisor had died and not the client. One can understand why this study has never been officially released.

Here's the thread: Fidelity: Successful investors forget they have an account (Sep 05, 2014)

And the article link: Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious

The wiki has some background info: Rebalancing
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby LadyGeek » Wed Jan 11, 2017 6:49 pm

As a reminder, opinions are welcome from all perspectives. Please state your concerns in a civil and factual manner.
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Re: I'm just going to leave this here...

Postby Nick341981 » Wed Jan 11, 2017 6:49 pm

ThankYouJack wrote:
Nick341981 wrote:It is extremely interesting to say the least that a forum named after Jack Bogle doesn't even take his advice as far as rebalancing and international exposure goes. At best it's 50/50 here. There is definitely a hardcore group of "3 funds and rebalance as soon as I hit my bands" group running around.


I'd say most on here want to invest in low cost index funds and "stay the course". But I wouldn't say that everyone on here needs to follow everything that Mr. Bogle says or does.

Are you trolling us? :)


"Stay the course" and rebalancing are two different things. One has an active component to it. 50/50 at best here

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Re: I'm just going to leave this here...

Postby pierremonfrere » Wed Jan 11, 2017 6:54 pm

Nick341981 wrote:
ThankYouJack wrote:
Nick341981 wrote:It is extremely interesting to say the least that a forum named after Jack Bogle doesn't even take his advice as far as rebalancing and international exposure goes. At best it's 50/50 here. There is definitely a hardcore group of "3 funds and rebalance as soon as I hit my bands" group running around.


I'd say most on here want to invest in low cost index funds and "stay the course". But I wouldn't say that everyone on here needs to follow everything that Mr. Bogle says or does.

Are you trolling us? :)


"Stay the course" and rebalancing are two different things. One has an active component to it. 50/50 at best here



I disagree.

If your plan is to rebalance you can still stay the course. You just need a plan.

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby Dieharder » Wed Jan 11, 2017 6:58 pm

Trash.

This writer and the expert named there needs some basic financial math lessons.

they don't even understand the basic fact that a 50/50 portfolio will not shoot up to 70/30 even with some impressive stock returns. It would take an enormous amout of gains over a very lengthy period of time without any new contributions going in. Most people have contributions going in and/or withdrawals happening. No one ever invests on Day 1 and then does nothing else for the next 10 years for the portfolio to get out of order like that. I have barely experienced more than 5% movement in my equity/bonds allocation over the last 20 years and that included some serious movement either side. That too only once or twice. Sad to see people writing these articles are woefully unprepared for their own portffolio management.

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Re: I'm just going to leave this here...

Postby Rodc » Wed Jan 11, 2017 7:32 pm

livesoft wrote:Well, I'm just going to leave this here, too:

You have probably seen the hearsay that Fidelity did a study and found that investors who had died and thus no transactions for awhile had the best returns. This article is reminiscent of that, but ...

No! No! No! That's not the study that Fidelity actually did. I have a friend that works at Fidelity and she says Fidelity folks are amused by this "mix-up." Fidelity did do a study, but they found that the accounts that had the best performance were the one's where the advisor had died and not the client. One can understand why this study has never been officially released.


:)
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Re: I'm just going to leave this here...

Postby Nick341981 » Wed Jan 11, 2017 7:36 pm

pierremonfrere wrote:
Nick341981 wrote:
ThankYouJack wrote:
Nick341981 wrote:It is extremely interesting to say the least that a forum named after Jack Bogle doesn't even take his advice as far as rebalancing and international exposure goes. At best it's 50/50 here. There is definitely a hardcore group of "3 funds and rebalance as soon as I hit my bands" group running around.


I'd say most on here want to invest in low cost index funds and "stay the course". But I wouldn't say that everyone on here needs to follow everything that Mr. Bogle says or does.

Are you trolling us? :)


"Stay the course" and rebalancing are two different things. One has an active component to it. 50/50 at best here



I disagree.

If your plan is to rebalance you can still stay the course. You just need a plan.


Why not just go full active investor and pick your own stocks too? Why only go half way with rebalancing? You can have a great plan to be a stock picker too. :)

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby iceport » Wed Jan 11, 2017 7:48 pm

“Contrary to common belief and to the misguided conclusions of most of the articles in academic finance journals, rebalancing offers no ‘free lunch,’ either in terms of enhanced return or reduced risk,” Edesess wrote in his report. “The choice of rebalancing as an investment discipline as compared with an alternative such as buy-and-hold is simply a risk-return trade-off — though one that is a little more subtle than most."


The only thing that bothers me about the article — which is rather benign and should be unremarkable for most here — is that it does not differentiate the effects of re-balancing between asset types with markedly different risk/return characteristics from re-balancing between asset types with very similar risk/return characteristics but low correlation. I realize when most of us re-balance, we do it across the entire portfolio at once. But while re-balancing from stocks to bonds can be expected to lower risk/return, re-balancing among the assets with similar expected returns does stand a better chance of producing the fabled "re-balancing bonus."
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Re: I'm just going to leave this here...

Postby pierremonfrere » Wed Jan 11, 2017 7:54 pm

Nick341981 wrote:
pierremonfrere wrote:
Nick341981 wrote:
ThankYouJack wrote:
Nick341981 wrote:It is extremely interesting to say the least that a forum named after Jack Bogle doesn't even take his advice as far as rebalancing and international exposure goes. At best it's 50/50 here. There is definitely a hardcore group of "3 funds and rebalance as soon as I hit my bands" group running around.


I'd say most on here want to invest in low cost index funds and "stay the course". But I wouldn't say that everyone on here needs to follow everything that Mr. Bogle says or does.

Are you trolling us? :)


"Stay the course" and rebalancing are two different things. One has an active component to it. 50/50 at best here



I disagree.

If your plan is to rebalance you can still stay the course. You just need a plan.


Why not just go full active investor and pick your own stocks too? Why only go half way with rebalancing? You can have a great plan to be a stock picker too. :)


Some plans are better than others.

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Re: I'm just going to leave this here...

Postby blueblock » Wed Jan 11, 2017 8:19 pm

livesoft wrote:Fidelity did do a study, but they found that the accounts that had the best performance were the one's where the advisor had died and not the client.


I think this may be the first time that a post here made me laugh out loud.

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby inbox788 » Thu Jan 12, 2017 4:52 am

FWIW, I rebalanced 1% recently from stocks to bonds. I'm outside my bands, so should be rebalancing more, but I guess I'm doing what the article says. The rebalance should have been about 3-5%, but I'm taking the "dollar cost averaging" method and will do another 1% soon. Figure if stocks continue to out perform bonds, I'll have to keep going as I lag, but I gain on the part that wasn't rebalanced. If stocks and bonds go up the same amount, I'm still no worse off. Similarly, if they both fall, then we're all doing poorly, but as far as the rebalance goes, it's a wash. And in the case where stocks underperform bonds, well, I guess the rebalance corrected itself.

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby rkhusky » Thu Jan 12, 2017 8:30 am

FWIW, in order for a 50/50 portfolio to jump to 70/30, stocks would need to increase by 133% (i.e. more than double), with bonds returning nothing. If one bought VTSAX (Total Stock) and VBTLX (Total Bond) 5 years ago at a ratio of 50/50, then it would be about 65/35 now in a tax advantaged account (VTSAX has doubled in the last 5 years). The ratio would be smaller if you included int'l stocks.

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby livesoft » Thu Jan 12, 2017 10:00 am

For those interested in the original article by Michael Edesess that led eventually in a round-about way to the WaPo article, then here it is:

https://www.advisorperspectives.com/art ... ebalancing

Edesess writes about a previous article by A. Wise
M. Edesess wrote:The Wise article is by far the most mathematically sophisticated and well-specified of all the journal articles I have found. It produces the most meaningful practical results as well. And its inferences about rebalancing of real portfolios are in complete agreement with the conclusions of its own math, unlike, believe it or not, some of the finance articles.

and
M. Edesess wrote:Wise then went on to derive an interesting formula for the probability that buy-and-hold will beat rebalancing in the very long run – that is, as time goes to infinity. The result is that if the average difference between constituent portfolio assets’ expected returns is small, less than about one percent, then rebalancing will, in the very long run – that is, at eternity – surely beat buy-and-hold; but if the average difference is greater than that, buy-and-hold will surely beat rebalancing.

and more
Since getting involved with the financial industry years ago, I have found that it most often uses mathematics not as a means to solve problems or derive answers, the way it is used in the sciences and technology, but as a sales tool, to make it appear that it was used to solve problems or derive answers – and to impress and baffle. This is not necessarily done deliberately; it is a habit that is easy to slide into, if one joins the profession and attempts to mimic one’s peers.


His article is consistent with all the rebalancing threads and ideas at Bogleheads.org.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby qwertyjazz » Thu Jan 12, 2017 10:39 am

livesoft wrote:For those interested in the original article by Michael Edesess that led eventually in a round-about way to the WaPo article, then here it is:

https://www.advisorperspectives.com/art ... ebalancing

Edesess writes about a previous article by A. Wise
M. Edesess wrote:The Wise article is by far the most mathematically sophisticated and well-specified of all the journal articles I have found. It produces the most meaningful practical results as well. And its inferences about rebalancing of real portfolios are in complete agreement with the conclusions of its own math, unlike, believe it or not, some of the finance articles.

and
M. Edesess wrote:Wise then went on to derive an interesting formula for the probability that buy-and-hold will beat rebalancing in the very long run – that is, as time goes to infinity. The result is that if the average difference between constituent portfolio assets’ expected returns is small, less than about one percent, then rebalancing will, in the very long run – that is, at eternity – surely beat buy-and-hold; but if the average difference is greater than that, buy-and-hold will surely beat rebalancing.

and more
Since getting involved with the financial industry years ago, I have found that it most often uses mathematics not as a means to solve problems or derive answers, the way it is used in the sciences and technology, but as a sales tool, to make it appear that it was used to solve problems or derive answers – and to impress and baffle. This is not necessarily done deliberately; it is a habit that is easy to slide into, if one joins the profession and attempts to mimic one’s peers.


His article is consistent with all the rebalancing threads and ideas at Bogleheads.org.


Very interesting article. I will need a while (if I can get to it) to digest the original Wise paper. This would imply buy and hold makes the most sense when expected returns are the most different. One would need to overlay a family of utility maximization formulation over the distributions of returns. But when simmilar returns, rebalancing might even increase the mean return and not dramatically extend the upper end of the tail (decrease risk and returns sort of). But with far different expected rates, you would need a very large risk aversion for rebalancing to make sense. A bucket like approach to bonds make sense. Rebalance different types of stocks/commondities posdibly.
Please correct me if I misunderstood.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby livesoft » Thu Jan 12, 2017 10:42 am

qwertyjazz wrote:Very interesting article. I will need a while (if I can get to it) to digest the original Wise paper. This would imply buy and hold makes the most sense when expected returns are the most different.
[...]
Please correct me if I misunderstood.
Thank you
QJ

No, I think it means that one should rebalance to achieve the risk level that one wants and not worry about performance. Sure, buy-and-hold make the most sense if the goal is to have the mostest money. It also means that one can use buy-and-hold as a mental crutch to take on more risk.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby qwertyjazz » Thu Jan 12, 2017 11:00 am

livesoft wrote:
qwertyjazz wrote:Very interesting article. I will need a while (if I can get to it) to digest the original Wise paper. This would imply buy and hold makes the most sense when expected returns are the most different.
[...]
Please correct me if I misunderstood.
Thank you
QJ

No, I think it means that one should rebalance to achieve the risk level that one wants and not worry about performance. Sure, buy-and-hold make the most sense if the goal is to have the mostest money. It also means that one can use buy-and-hold as a mental crutch to take on more risk.

The mental crunch thing in some ways appeals to me ...
But more directly, risk is not a fixed value regardless of wealth. I would think there would be 2 opposing factors of a wealth effect. The marginal utility of the extra dollar would decrease, but also would the negative marginal utility of losing a dollar would decrease (you could afford it). It would matter how flat the utility curve became vs how much more you could make with buy and hold vs rebalance. I am going to have to think about this to understand what that means in terms of portfolio construction.
Thank you
QJ
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby Rodc » Thu Jan 12, 2017 11:03 am

livesoft wrote:
M. Edesess wrote:Wise then went on to derive an interesting formula for the probability that buy-and-hold will beat rebalancing in the very long run – that is, as time goes to infinity. The result is that if the average difference between constituent portfolio assets’ expected returns is small, less than about one percent, then rebalancing will, in the very long run – that is, at eternity – surely beat buy-and-hold; but if the average difference is greater than that, buy-and-hold will surely beat rebalancing.


Very interesting article, thanks for bringing it to our attention.

I presume buried in the math behind that quote is an assumption on the magnitude of the correlation in returns.

But the result is at least intuitively correct.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby TheTimeLord » Thu Jan 12, 2017 11:04 am

Nick341981 wrote:And watch as bogleheads begin to explode with rage. Let me get my popcorn ready. :mrgreen:



https://www.washingtonpost.com/news/bus ... b6267e4743


Bogleheads maybe, but no Mr. Bogle who is a rebalancing guy. Also this goes with the Fidelity study that showed their best performing clients were either dead or forgot they had accounts.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby S&L1940 » Thu Jan 12, 2017 11:09 am

Confession
Retired. I do not intentionally rebalance. Usually, I tweak the percentages with the RMD that I take quarterly. Currently 55/45 and would stay the course even if it changed +- by 5%. Did not make any changes in '08 which worked out just fine.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby livesoft » Thu Jan 12, 2017 11:23 am

Rodc wrote:But the result is at least intuitively correct.

It is probably intuitively correct that if we took two portfolios over time both consisting of equities and bonds and did whatever kind of rebalancing or buy-and-hold or whatever to them, ...

... and computed the average daily allocation to equities (60%, 59.5%, 61%, ...), then the portfolio with the highest average daily allocation to equities would probably have the highest performance.

That might mean, always rebalance into equities when they go under one's desired allocation to them, and never rebalance out of equities if they exceed one's desired allocation to them. But that's not quite portfolio management, is it?
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby qwertyjazz » Thu Jan 12, 2017 11:39 am

livesoft wrote:
Rodc wrote:But the result is at least intuitively correct.

It is probably intuitively correct that if we took two portfolios over time both consisting of equities and bonds and did whatever kind of rebalancing or buy-and-hold or whatever to them, ...

... and computed the average daily allocation to equities (60%, 59.5%, 61%, ...), then the portfolio with the highest average daily allocation to equities would probably have the highest performance.

That might mean, always rebalance into equities when they go under one's desired allocation to them, and never rebalance out of equities if they exceed one's desired allocation to them. But that's not quite portfolio management, is it?


Starting to think it means rebalance into bonds for risk/utility purposes if they ever drop below a certain absolute value (not relative)
Rebalance across equity classes - especially those with higher variances (your comments on EM) in percentage manner to control risk

The problem is I am not sure I understand even my own utility curve when it comes to money let alone anyone else's.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby livesoft » Thu Jan 12, 2017 11:46 am

Some of the other Edesess articles referenced in the linked article are probably worth checking into such as this one:
http://www.advisorperspectives.com/arti ... educe-risk
with this concluding paragraph:
There are two lessons to be learned here. One, there is nothing special about rebalancing. Two, standard deviation of long-term returns is a poor proxy for risk. Neither buy-and-hold nor rebalancing is necessarily the best strategy in all cases. In fact, any strategy will need to be adjusted periodically based on the investor’s circumstances and the investment prospects. However, buy-and-hold has many attractive features, not least that it requires the minimal amount of trading and that it can provide a cushion against deep risk that a rebalancing strategy and many other similar strategies cannot provide.


A side topic on this is whether a Roth IRA should be buy-and-hold in stocks only versus rebalanced. That is, should one put the asset class with the higher expected return in a Roth account and keep asset classes with lower expected return out of Roth IRAs if possible?
Last edited by livesoft on Thu Jan 12, 2017 12:08 pm, edited 2 times in total.
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby RadAudit » Thu Jan 12, 2017 11:49 am

I long ago figured out that I wasn't special. Think I'll go along with what's best for most people.

For most individuals and institutions, it’s a wise idea to basically control the amount of risk in the overall portfolio by setting targets for the percentage of your portfolio that you would want in equities, in debt securities or bonds, and in cash, certificates of deposit, Treasury notes and Treasury bills.”
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby rkhusky » Thu Jan 12, 2017 12:11 pm

livesoft wrote:
Rodc wrote:But the result is at least intuitively correct.

It is probably intuitively correct that if we took two portfolios over time both consisting of equities and bonds and did whatever kind of rebalancing or buy-and-hold or whatever to them, ...

... and computed the average daily allocation to equities (60%, 59.5%, 61%, ...), then the portfolio with the highest average daily allocation to equities would probably have the highest performance.

That might mean, always rebalance into equities when they go under one's desired allocation to them, and never rebalance out of equities if they exceed one's desired allocation to them. But that's not quite portfolio management, is it?

That is probably right for a infinite investing horizon, but for those of us who are banking on our retirement funds for our retirement, the opposite might be better - rebalance out of stocks, never into them.

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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby qwertyjazz » Thu Jan 12, 2017 12:16 pm

rkhusky wrote:
livesoft wrote:
Rodc wrote:But the result is at least intuitively correct.

It is probably intuitively correct that if we took two portfolios over time both consisting of equities and bonds and did whatever kind of rebalancing or buy-and-hold or whatever to them, ...

... and computed the average daily allocation to equities (60%, 59.5%, 61%, ...), then the portfolio with the highest average daily allocation to equities would probably have the highest performance.

That might mean, always rebalance into equities when they go under one's desired allocation to them, and never rebalance out of equities if they exceed one's desired allocation to them. But that's not quite portfolio management, is it?

That is probably right for a infinite investing horizon, but for those of us who are banking on our retirement funds for our retirement, the opposite might be better - rebalance out of stocks, never into them.


That I believe was Livesoft's excellent point that buy and hold is just hiding excepting more risk. A corollary to that is one way rebalancing is either increasing or decreasing risk with resultant consequences
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Rodc
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby Rodc » Thu Jan 12, 2017 12:21 pm

rkhusky wrote:
livesoft wrote:
Rodc wrote:But the result is at least intuitively correct.

It is probably intuitively correct that if we took two portfolios over time both consisting of equities and bonds and did whatever kind of rebalancing or buy-and-hold or whatever to them, ...

... and computed the average daily allocation to equities (60%, 59.5%, 61%, ...), then the portfolio with the highest average daily allocation to equities would probably have the highest performance.

That might mean, always rebalance into equities when they go under one's desired allocation to them, and never rebalance out of equities if they exceed one's desired allocation to them. But that's not quite portfolio management, is it?

That is probably right for a infinite investing horizon, but for those of us who are banking on our retirement funds for our retirement, the opposite might be better - rebalance out of stocks, never into them.


Interestingly, back in the beginning of time ( :) ) my 401K only allowed rebalancing out of stocks, not into them. You could change to direct 100% of new money into stocks if you wished.
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saltycaper
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Re: I'm just going to leave this here... [Should you rebalance your portfolio?]

Postby saltycaper » Thu Jan 12, 2017 1:09 pm

No, you should never "rebalance" your portfolio. Rather, you should consciously determine what AA you want, and then execute whatever transactions are necessary to achieve your AA, minding taxes, fees, your time, etc.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan


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