Rebalancing Bands-Someone please explain??

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Windylotus
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Joined: Thu Nov 30, 2017 10:49 pm

Rebalancing Bands-Someone please explain??

Post by Windylotus » Sun Jan 21, 2018 4:30 am

Hello BH community,

I am constantly seeing the term "rebalancing bands" come up in different threads. Can someone please explain this to me and where to find more information out about it?

Is this a hard and fast rule for everyone? For example, if you get to be 5%-10% away from your desired AA, do you rebalance then?

Is the rebalancing band percentage also based on your risk appetite? It seems some people who are risk adverse will rebalance at a lower percentage (5%-) off their desired AA, whereas risk takers may be more like (10%+) before rebalancing. Are there pro's or con's to this?

So far I have typically been rebalancing twice a year. Early summerish and around Christmas time. (just depends in the crazy run-up in the markets. And crazy it has been!) I'm not really sure why I have chosen those times but thus far has seemed to work for me. So, are rebalancing bands even necessary?

My desired AA is currently 80/20. My current bond position is at 18.58% since this last Christmas rebalance. At what point in the rebalancing band spectrum will I want to sell off some of my equity positions to bring my 80/20 AA back into balance? Thank you all for your wisdom :happy

livesoft
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Re: Rebalancing Bands-Someone please explain??

Post by livesoft » Sun Jan 21, 2018 4:40 am

Is the explanation in the bogleheads wiki sufficient? How about the links in the wiki?

https://www.bogleheads.org/wiki/Rebalancing
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Windylotus
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Joined: Thu Nov 30, 2017 10:49 pm

Re: Rebalancing Bands-Someone please explain??

Post by Windylotus » Sun Jan 21, 2018 4:54 am

Thank you livesoft. There seems to be a lot of great information on rebalancing there. I will do some more reading, thanks again.

JustinR
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Re: Rebalancing Bands-Someone please explain??

Post by JustinR » Sun Jan 21, 2018 5:36 am

It's so that your asset allocation doesn't drift too far out of whack, and it also gives you an objective time to rebalance without timing the market.

So common rebalancing bands would be:
  • A relative 25% from the desired allocation. This is good for small allocation percentages. For example, if your Small Value allocation is 15%, then your bands would be 11.25% and 18.75% (15% +/- 15%*25%).
  • An absolute 5% from the desired allocation. This is good for large allocation percentages (since a relative 25% of a large allocation would have bands that are too big). For example, if your bond allocation is 30%, then your bands would be 25% and 35%.
What I do is use the 25% relative bands for allocations under 20%, and the 5% absolute bands for allocations over 20%.

Windylotus wrote:
Sun Jan 21, 2018 4:30 am
My desired AA is currently 80/20. My current bond position is at 18.58% since this last Christmas rebalance. At what point in the rebalancing band spectrum will I want to sell off some of my equity positions to bring my 80/20 AA back into balance? Thank you all for your wisdom :happy
So what you could do is use a 5% rebalancing band, and rebalance when your equities hit 75% or 85%.

Note that you can also "rebalance" with new money at any time, so you are allowed to rebalance before you hit the bands. So since you're low on bonds right now, you could buy some more bonds.

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Doc
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Re: Rebalancing Bands-Someone please explain??

Post by Doc » Sun Jan 21, 2018 11:15 am

JustinR wrote:
Sun Jan 21, 2018 5:36 am
Note that you can also "rebalance" with new money at any time, so you are allowed to rebalance before you hit the bands. So since you're low on bonds right now, you could buy some more bonds.
I like your quotes as in "rebalance". I think of using new money as "balancing" not "rebalancing".

As one's portfolio grows "balancing" with new money becomes less effective and it is even insufficient for smaller portfolios in market corrections. But then not many new investors will buy stocks when the Dow is down 10% or more. Bands or not.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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