Perhaps you shouldn't rebalance your international stock allocation

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
CULater
Posts: 459
Joined: Sun Nov 13, 2016 10:59 am

Perhaps you shouldn't rebalance your international stock allocation

Post by CULater » Mon Aug 28, 2017 9:55 pm

Something I've wondered about and just took a look at. What would be the difference in returns between holding one global stock fund vs. diversifying across international markets by holding, say, a US market fund, a European Developed Market Fund, a Pacific Developed Market Fund, and an Emerging Market fund in the approximate relative weights represented in the Global Stock fund?

Well, the answer is that there isn't much difference as long as you don't rebalance. Over time, the relative market weights in a cap-weighted Global Stock fund will change based on the relative cap-weighting of the represented markets. If you hold a bunch of separate international market funds and you don't rebalance, the same thing will happen; i.e., the relative weights in your portfolio will change based on changes in the relative cap weighing of the represented international markets.

The question then arises whether it is better to let your global stock portfolio track market weights by never rebalancing, or is it better to rebalance to your original weights on a periodic basis? From my initial explorations into the matter using Portfolio Visualizer, it doesn't make a huge difference, but NOT rebalancing your international stock market holdings tends to do a little better than rebalancing, whether on a monthly, quarterly, semi-annual, or annual basis. In other words, letting your international market weights drift in accordance with global cap-weighting seems to be the better approach.

This suggests to me that rebalancing a globally diversified stock portfolio may be an unnecessary waste of time which doesn't improve returns or lower volatility or magnitude of worst drawdowns. If you are happy with the international market weights represented by the Global Equity market then just hold one Global Stock Fund. If you want to customize your international market weights to taste, then hold separate international market funds -- but don't bother rebalancing them. Going forward, allow the weights to drift in accordance with changes reflecting relative international cap weighting. Less work, more reward. Comments?
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

MnD
Posts: 3073
Joined: Mon Jan 14, 2008 12:41 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by MnD » Mon Aug 28, 2017 10:53 pm

Global market cap all the way. No rebalancing required as you point out.
There is no natural US ex-US ratio that we need to maintain in anticipation of reversion.

Suppose due to "who knows what" Us:ex-US moves from roughly 50:50 now to 80:20 - or 20:80 over the next few decades.
Sticking with an arbitrary 50:50 mix would require massive rebalancing away from global market cap.
And it would be gambling versus investing, since the tilt away from US or to US versus the current global cap would be arbitrary.

Tamalak
Posts: 401
Joined: Fri May 06, 2016 2:29 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by Tamalak » Tue Aug 29, 2017 7:13 am

I hold VTI and VXUS at cap, and you're right that there's not a lot of need for rebalancing, but what about new IPOs? Those won't increase the value of a fund but they will increase the capitalization of that region.

rkhusky
Posts: 4397
Joined: Thu Aug 18, 2011 8:09 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by rkhusky » Tue Aug 29, 2017 10:05 am

If you start out with market weights, presumably you want market weights, so why would you want to rebalance to the "old" market weights?

On the other hand, if you have chosen an allocation different than market weights, presumably because you want an allocation different than market weights, why would you not rebalance to your chosen weights?

aj76er
Posts: 343
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by aj76er » Tue Aug 29, 2017 4:52 pm

Here are some reasons to hold a fixed percentage of international (less than market weight):

1. Because of the fact that the U.S. has a dominant currency, many people want to limit their currency risk. If the U.S. dollar does well relative to the rest of the world, then un-hedged international funds will lose value when converted into U.S. dollars (with all else being equal). Currency fluctuations add to the overall standard deviation of a portfolio, but it is risk that goes uncompensated (over long time periods).
2. There is generally less transparency and less regulation of foreign companies (especially emerging markets). This (mostly) leads to more accurate valuations and more stable prices.
3. There are higher costs associated with international investing such as higher E/R's, foreign taxes, lower percentage of non-qualified dividends, and overall increased tax complexity (if held in taxable).
4. The U.S. currently has a broad, diverse economy and many companies get a significant amount of revenue from selling in foreign markets (and thus you still benefit from foreign prosperity).
5. Price discovery is better in a domestic market because the exchanges are open when the indexes are bought/sold.
6. A domestic market will have better liability matching for ones own spending. U.S. companies earnings should have better tracking of U.S. inflation than inflation in other countries. This is another effect of currency fluctuations (see #1).
7. A domestic stock market will have stronger un-correlated behavior to local domestic bond market (resulting in a more efficient portfolio).

Thus, it always isn't about higher return, but about mitigating risk, cost, and complexity.

In your backtesting, did stddev increase with returns? If so, then this merely indicates more reward for more risk.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

CULater
Posts: 459
Joined: Sun Nov 13, 2016 10:59 am

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by CULater » Tue Aug 29, 2017 6:38 pm

No, had about the same volatility and max drawdowns when not rebalanced. Let's take the case of starting with 50% US, 35% EAFE, and 15% EM held since Jan 1995 (first date of available data for EM). Here are the data for annual rebalancing, monthly rebalancing, and no rebalancing:

_________CAGR______SD____WORST YEAR_____MAX DRAWDOWN_____SHARPE
Annual.....8.02%.....15.70.%......-40.89%..............-54.86%................0.42
Monthly....7.83%.....15.73%.......-40.96%..............-54.86%................0.41
No............8.09%.....15.47%.......-40.83%..............-54.57%................0.43

Virtually no difference between not rebalancing and rebalancing yearly or monthly; a tendency for more frequent rebalancing to perform worse. Hard to see why it makes any sense to incur the extra expense and effort to rebalance between international index market holdings. At the most, it might make sense to keep track of relative weights and if they really get out of whack after a couple of decades or so do some rebalancing. Or, some might argue that near or in retirement it makes sense to only invest in US stocks in order to eliminate currency risk.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

aj76er
Posts: 343
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by aj76er » Tue Aug 29, 2017 8:31 pm

CULater wrote:
Tue Aug 29, 2017 6:38 pm
No, had about the same volatility and max drawdowns when not rebalanced. Let's take the case of starting with 50% US, 35% EAFE, and 15% EM held since Jan 1995 (first date of available data for EM). Here are the data for annual rebalancing, monthly rebalancing, and no rebalancing:

_________CAGR______SD____WORST YEAR_____MAX DRAWDOWN_____SHARPE
Annual.....8.02%.....15.70.%......-40.89%..............-54.86%................0.42
Monthly....7.83%.....15.73%.......-40.96%..............-54.86%................0.41
No............8.09%.....15.47%.......-40.83%..............-54.57%................0.43

Virtually no difference between not rebalancing and rebalancing yearly or monthly; a tendency for more frequent rebalancing to perform worse. Hard to see why it makes any sense to incur the extra expense and effort to rebalance between international index market holdings. At the most, it might make sense to keep track of relative weights and if they really get out of whack after a couple of decades or so do some rebalancing. Or, some might argue that near or in retirement it makes sense to only invest in US stocks in order to eliminate currency risk.
Interesting. Thanks for posting the results.

I agree with all your conclusions :).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

User avatar
TD2626
Posts: 519
Joined: Thu Mar 16, 2017 3:40 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by TD2626 » Tue Aug 29, 2017 8:46 pm

I like options that include a global cap weight fund (like Vanguard Total World... if it only had admiral shares :annoyed ).

There is substantial currency risk with the globally cap weighted option - and this could be mitigated with a home country tilt. Indeed, this is the most reasonable and rational argument in favor of a home country bias. Such a tilt could be accomplished with Total World + Total US, not rebalanced. (I think there was a thread on this recently).

That being said, rebalancing could, in theory, provide a "rebalancing bonus" if you believe that such a bonus would occur. But said rebalancing to me seems speculative, as was mentioned.

It is also worth noting that few are at cap weight in international bonds / cash and presumably everyone has their human capital in domestic, so it is possible that relatively high foreign equities could be reasonable if there are no/few international bonds.

User avatar
saltycaper
Posts: 2127
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by saltycaper » Tue Aug 29, 2017 10:38 pm

CULater wrote:
Mon Aug 28, 2017 9:55 pm

Over time, the relative market weights in a cap-weighted Global Stock fund will change based on the relative cap-weighting of the represented markets. If you hold a bunch of separate international market funds and you don't rebalance, the same thing will happen; i.e., the relative weights in your portfolio will change based on changes in the relative cap weighing of the represented international markets.
Are you sure? Wouldn't currency effects, even over periods of 10 or 20 years, possibly result in the portfolio deviating from the market weight? Not questioning the PV results, just the concept.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

rkhusky
Posts: 4397
Joined: Thu Aug 18, 2011 8:09 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by rkhusky » Wed Aug 30, 2017 7:46 am

CULater wrote:
Tue Aug 29, 2017 6:38 pm
No, had about the same volatility and max drawdowns when not rebalanced. Let's take the case of starting with 50% US, 35% EAFE, and 15% EM held since Jan 1995 (first date of available data for EM).
Do you find the same result if you start with 80% US, 15% EAFE and 5% EM? And also different time periods, such as 1995-2005 and 2006-2017 to make sure there are no peculiarities with the chosen time period?

I don't find rebalancing to be all that burdensome or costly and I rebalance every month or two.

staythecourse
Posts: 4964
Joined: Mon Jan 03, 2011 9:40 am

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by staythecourse » Wed Aug 30, 2017 8:15 am

rkhusky wrote:
Wed Aug 30, 2017 7:46 am
CULater wrote:
Tue Aug 29, 2017 6:38 pm
No, had about the same volatility and max drawdowns when not rebalanced. Let's take the case of starting with 50% US, 35% EAFE, and 15% EM held since Jan 1995 (first date of available data for EM).
Do you find the same result if you start with 80% US, 15% EAFE and 5% EM? And also different time periods, such as 1995-2005 and 2006-2017 to make sure there are no peculiarities with the chosen time period?

I don't find rebalancing to be all that burdensome or costly and I rebalance every month or two.
Beat me to it. Before I trust the meaning behind any of the results would need a few more different combinations of asset allocation (higher % US or get rid of EAFE and just do US/ EM combo), different time points to prevent cherry picking (my favorite is 10 year rolling returns), and different time duration (5, 10, 20 years for example).

Just off the top of my head I can see the results being true as 80% of the asset allocation has the same risk/ return characteristics AND are highly correlated especially since the start of the Euro (US+ EAFE).

Good luck.

p.s. This is why I have ALWAYS advocated folks who are doing a 3 fund to skip TISM and add Intenational small value instead as it should be a better diversifier then TISM with TSM.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

CULater
Posts: 459
Joined: Sun Nov 13, 2016 10:59 am

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by CULater » Wed Aug 30, 2017 8:35 am

Well, in a sense, choosing not to rebalance your international holdings is a decision to allow your international market weights to represent the relative growth of the various international markets represented. Can you imagine, for example, investing maybe 5% in the US market way back when the US had small relative market cap and then continuing to rebalance back to 5% as the US grew in market cap and eventually became 60% of world cap?

Anyway, if you hold a European, Pacific, or Emerging market fund, each is composed of multiple countries and the relative weights of those countries in each fund is changing all the time based on relative market caps; there is no "re-balancing" of those weights within the funds. Are you worried about that? So what is the big deal about rebalancing between, say, European, Pacific, US, and Emerging Market chunks? It's just more countries packaged in separate "chunks". Is it logical to rebalance the "chunks" and not the pieces inside the "chunks"? I suspect this is a case of rebalancing for the sake of rebalancing and not because there's any evidence it actually does any good. Can you quote me any research data to support the practice?

Don't they say that market-cap weighting is the most efficient portfolio? That should also be true if you wish to hold a globally diversified equity portfolio, yes? Which means a global cap-weighted fund, which allows relative market weights to drift based on cap weights. Or, if you have some good reasons to overweight/underweight certain international markets that makes sense, but then allow the weights to drift based on cap-weighting instead of rebalancing back to initial weights.
Last edited by CULater on Wed Aug 30, 2017 9:30 am, edited 1 time in total.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

harvestbook
Posts: 314
Joined: Sat Mar 18, 2017 7:12 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by harvestbook » Wed Aug 30, 2017 8:41 am

aj76er wrote:
Tue Aug 29, 2017 4:52 pm
Here are some reasons to hold a fixed percentage of international (less than market weight):

Thus, it always isn't about higher return, but about mitigating risk, cost, and complexity.
And the opposite of those reasons is exactly why I prefer hold international at global market weight.
I'm not smart enough to know, and I can't afford to guess.

CULater
Posts: 459
Joined: Sun Nov 13, 2016 10:59 am

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by CULater » Wed Aug 30, 2017 10:29 am

So, just to pick another comparison you can look at a 50/50 allocation between US and EAFE from Jan, 1986 (first date of available data for EAFE). If you rebalanced annually you ended up with:
CAGR = 9.06%
SD = 14.78%
Worst Year = - 39.15%
Worst Drawdown = -54.04%
Sharpe = 0.44

Now if you didn't rebalance you ended up with:
CAGR = 9.07%
SD = 15.07%
Worst Year = -38.85%
Worst Drawdown = -53.55%
Sharpe = 0.44

Again, no difference (excluding the costs of rebalancing if you did that).

I'm not really up to picking every combo and time period, but the dozen or so I've played with pretty much end up the same. I might suggest that someone who finds a combo and time period that shows differently might be guilty of cherry-picking. :wink:
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

rkhusky
Posts: 4397
Joined: Thu Aug 18, 2011 8:09 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by rkhusky » Wed Aug 30, 2017 11:14 am

CULater wrote:
Wed Aug 30, 2017 8:35 am
Don't they say that market-cap weighting is the most efficient portfolio? That should also be true if you wish to hold a globally diversified equity portfolio, yes?
Market cap weighting is most efficient, but there is a marginal difference between one overall cap-weighted fund with thousands of stocks and two cap-weighted funds, each with thousands of stocks. You would see a larger difference when comparing the efficiency between a cap-weighted fund and an equal-weighted fund, each with thousands of stocks.

Out of curiosity what has been the relative US market cap over the last 30 years?

Edit: Finally found the answer to the above, which is surprisingly hard to find with a simple Google search. Easily found on Vanguard's site. Mid 80's to Mid 90's - US had 35%+-5%, Mid 90's to present - US had 45%+-5% global market cap. Given the relatively constant ratio over the last 20 years, it's not surprising that rebalancing didn't have much of an effect.

MnD
Posts: 3073
Joined: Mon Jan 14, 2008 12:41 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by MnD » Thu Aug 31, 2017 8:07 am

These are arguments to disproportionally overweight the US, not to hold a fixed % of international.
Suppose you chose to hold 60% US and 40% international. If for whatever reason US went to 70% of global market cap, would someone abiding by the arguments below continue to hold only 60% US - thus tilting to international versus a global weighting that floats? I don't think so given the list below is really just a lot of generalizations for American exceptionalism.
aj76er wrote:
Tue Aug 29, 2017 4:52 pm
Here are some reasons to hold a fixed percentage of international (less than market weight):

1. Because of the fact that the U.S. has a dominant currency, many people want to limit their currency risk. If the U.S. dollar does well relative to the rest of the world, then un-hedged international funds will lose value when converted into U.S. dollars (with all else being equal). Currency fluctuations add to the overall standard deviation of a portfolio, but it is risk that goes uncompensated (over long time periods).
2. There is generally less transparency and less regulation of foreign companies (especially emerging markets). This (mostly) leads to more accurate valuations and more stable prices.
3. There are higher costs associated with international investing such as higher E/R's, foreign taxes, lower percentage of non-qualified dividends, and overall increased tax complexity (if held in taxable).
4. The U.S. currently has a broad, diverse economy and many companies get a significant amount of revenue from selling in foreign markets (and thus you still benefit from foreign prosperity).
5. Price discovery is better in a domestic market because the exchanges are open when the indexes are bought/sold.
6. A domestic market will have better liability matching for ones own spending. U.S. companies earnings should have better tracking of U.S. inflation than inflation in other countries. This is another effect of currency fluctuations (see #1).
7. A domestic stock market will have stronger un-correlated behavior to local domestic bond market (resulting in a more efficient portfolio).

Thus, it always isn't about higher return, but about mitigating risk, cost, and complexity.

In your backtesting, did stddev increase with returns? If so, then this merely indicates more reward for more risk.

aj76er
Posts: 343
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by aj76er » Thu Aug 31, 2017 2:13 pm

MnD wrote:
Thu Aug 31, 2017 8:07 am
These are arguments to disproportionally overweight the US, not to hold a fixed % of international.
Suppose you chose to hold 60% US and 40% international. If for whatever reason US went to 70% of global market cap, would someone abiding by the arguments below continue to hold only 60% US - thus tilting to international versus a global weighting that floats? I don't think so given the list below is really just a lot of generalizations for American exceptionalism.
aj76er wrote:
Tue Aug 29, 2017 4:52 pm
Here are some reasons to hold a fixed percentage of international (less than market weight):

1. Because of the fact that the U.S. has a dominant currency, many people want to limit their currency risk. If the U.S. dollar does well relative to the rest of the world, then un-hedged international funds will lose value when converted into U.S. dollars (with all else being equal). Currency fluctuations add to the overall standard deviation of a portfolio, but it is risk that goes uncompensated (over long time periods).
2. There is generally less transparency and less regulation of foreign companies (especially emerging markets). This (mostly) leads to more accurate valuations and more stable prices.
3. There are higher costs associated with international investing such as higher E/R's, foreign taxes, lower percentage of non-qualified dividends, and overall increased tax complexity (if held in taxable).
4. The U.S. currently has a broad, diverse economy and many companies get a significant amount of revenue from selling in foreign markets (and thus you still benefit from foreign prosperity).
5. Price discovery is better in a domestic market because the exchanges are open when the indexes are bought/sold.
6. A domestic market will have better liability matching for ones own spending. U.S. companies earnings should have better tracking of U.S. inflation than inflation in other countries. This is another effect of currency fluctuations (see #1).
7. A domestic stock market will have stronger un-correlated behavior to local domestic bond market (resulting in a more efficient portfolio).

Thus, it always isn't about higher return, but about mitigating risk, cost, and complexity.

In your backtesting, did stddev increase with returns? If so, then this merely indicates more reward for more risk.
I don't think they are complete generalizations nor U.S. exceptionalism. However, it should go without saying that U.S. investors are currently in a unique place in the investing world because their domestic economy is the largest, most diverse, and cheapest when compared elsewhere. Thus, if a U.S. investor is looking for simplicity and low-cost, then having the majority (or even 100%) of one's equities in U.S. makes a lot of sense.

It's sorta like saying owning the largest 250 stocks, if could be done simpler and cheaper than S&P would be fine. Ideal? no. But it gets the job done.

Additionally, currency exchange risks are real, and it has harmed a globally diversified U.S. investor over the last decade. But, of course, it cuts both ways and can help too.

This article is a good read:

https://portfoliocharts.com/2017/06/09/ ... awal-rate/

An opposing article (can't find link right now) by Kitces showed that across all countries diversifying globally increased SWR about 67% of the time. Other times, it decreased SWR.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

MnD
Posts: 3073
Joined: Mon Jan 14, 2008 12:41 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by MnD » Fri Sep 01, 2017 8:26 am

Although I don't have a crystal ball, I'm pretty sure the % of US in global market cap (currently 52%) will not remain static and will likely move significantly from this value over the coming years and decades. Maintaining a fixed percentage of international requires significant rebalancing with new funds and existing portfolio holdings. I don't know how that qualifies as simple and low cost.

Even if you are not at global market cap, allowing your portfolios US to ex-US allocation to float is a textbook example of low cost and simplicity.
In contrast, setting and maintaining some fixed percentage as US market cap % fluctuates is increasingly gambling as US % rises or falls.
If US rises you are increasingly betting against the US as you sell US and buy ex-US to maintain your fixed allocation.
Likewise if US falls you are increasingly doubling down to buy US contrary to the changes in weighting of global cap indices.
That doesn't seem very Bogleheadesque.

aj76er
Posts: 343
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by aj76er » Fri Sep 01, 2017 2:39 pm

One approach for those wanting to tilt to U.S. but still allow the ratio to drift with cap weightings is to use an Adaptive Asset allocation technique similar to what William Sharpe documented in this paper: https://web.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf.

In the paper, Sharpe demonstrates the math using a portfolio of global bonds vs global stocks; but the same can be applied to just the U.S. stocks vs. ex-U.S. stocks portion of the portfolio. The technique allows for drift but also provides for some rebalancing as well.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

aj76er
Posts: 343
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by aj76er » Fri Sep 01, 2017 5:01 pm

Here's an example of an adaptive AA policy in regards to US:exUS ratio:

“My Asset Allocation Policy is to have 67% invested in U.S. stocks and the
remainder in ex-U.S. stocks when the market value of U.S. stocks is 50% of the total value of
world stocks, with the proportions to be determined each period using the
adaptive asset allocation formula.”

And here's how the math would work out:

Code: Select all

                    U.S.           ex-U.S.          sum
                    ----           ---------        -----
mkt baseline        50             50
desired baseline    67             33
mkt current         55             45
ratio               73.7           29.7             103.4
Adaptive AA         71.3           28.7
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

Sirjames
Posts: 1
Joined: Tue Sep 12, 2017 1:53 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by Sirjames » Tue Sep 12, 2017 2:09 pm

Maybe I'm way off here and I'm early in my investing life.. but if you don't rebalance after a reasonable period of time... let's say every 12 mos to allow some portfolio drift when certain areas are doing well... are you not forgetting a basic premise of "buy low, sell high"? I would think that over a period of years to decades, an annual rebalance if your percent (band) difference between actual and target allocations would help you. Ie this year, international emerging markets have average returns near 20% YTD. So if you sell some of those shares to return to your target allocation, you are realizing those profits and buying relatively lower on another area of your portfolio. Obviously there is a spectrum of too much and too little rebalancing, but without doing this at all you simply let the assets return to their moving mean. Without selling some of the EM with 20% returns in 2017 you allow those shares to regress relatively to the rest of the market without realizing any "profits," if you can call it that.

For me, I will probably just buy more of whichever fund is performing poorly each year to try to correct my allocations by "buying low" without as much "selling high."

Anyone with me on this?

pascalwager
Posts: 906
Joined: Mon Oct 31, 2011 8:36 pm

Re: Perhaps you shouldn't rebalance your international stock allocation

Post by pascalwager » Tue Sep 12, 2017 4:31 pm

The global index doesn't matter--in fact it's completely irrelevant, if you're using several individual index funds.

If you believe that the individual cap-weighted funds cover the entire global stock market then you would need to use the individual index market values to determine the initial proportional allocations and then recheck for drift on a quarterly basis and "rebalance" or not depending on your tolerance for error. The re-check always uses the latest daily index market values which requires using the index fact sheet and also the Yahoo Finance adjusted prices.

Post Reply