question/idea about automatic rebalancing

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CuriousBill
Posts: 4
Joined: Mon Feb 12, 2018 6:22 pm

question/idea about automatic rebalancing

Post by CuriousBill » Tue Feb 13, 2018 1:24 pm

All,
Doing my taxes an idea popped into my head about automatic rebalancing. I'd be appreciative of your comments, especially of negative ones.

To explain, suppose in the simplest case you only have 2 funds: total stock market and total bond market. The idea is to direct all gains of each to purchase more of the other.
Possible/potential/maybe fantasy consequences I can see include: 1. whichever went up most the gains are used to purchase the one that is cheaper. Thus it would be sort of a value based rebalancing. 2. By doing so fluctuations/variance/etc would be damped somewhat. 3. It would automatically stay closer to the originally set % for each (at least compared to letting winner ride). 4. Maybe (?) by selling high and buying low it could nudge returns up slightly. and most importantly 5. It is automatic so good for someone [like me] too lazy to rebalance.

Obviously, this can be done with more funds and with weights [a fixed % reinvested in the fund and the rest used to invest in the other funds]. Obviously it doesnt eliminate risk or make the decision for you at the start of a target allocation.

I was just curious if an idea so simple, so easy and so inexpensive to execute [at least with Vanguard] is well know, been tried before, makes sense or the opposite.
Thanks, in advance for your responses. I especially appreciate thought out criticisms. Bill [first post of a long time follower]

FoolMeOnce
Posts: 71
Joined: Mon Apr 24, 2017 11:16 am

Re: question/idea about automatic rebalancing

Post by FoolMeOnce » Tue Feb 13, 2018 1:43 pm

CuriousBill wrote:
Tue Feb 13, 2018 1:24 pm
All,
Doing my taxes an idea popped into my head about automatic rebalancing. I'd be appreciative of your comments, especially of negative ones.

To explain, suppose in the simplest case you only have 2 funds: total stock market and total bond market. The idea is to direct all gains of each to purchase more of the other.
Possible/potential/maybe fantasy consequences I can see include: 1. whichever went up most the gains are used to purchase the one that is cheaper. Thus it would be sort of a value based rebalancing. 2. By doing so fluctuations/variance/etc would be damped somewhat. 3. It would automatically stay closer to the originally set % for each (at least compared to letting winner ride). 4. Maybe (?) by selling high and buying low it could nudge returns up slightly. and most importantly 5. It is automatic so good for someone [like me] too lazy to rebalance.

Obviously, this can be done with more funds and with weights [a fixed % reinvested in the fund and the rest used to invest in the other funds]. Obviously it doesnt eliminate risk or make the decision for you at the start of a target allocation.

I was just curious if an idea so simple, so easy and so inexpensive to execute [at least with Vanguard] is well know, been tried before, makes sense or the opposite.
Thanks, in advance for your responses. I especially appreciate thought out criticisms. Bill [first post of a long time follower]
Gains or passive income? Either way, I think this would significantly throw off your AA. Imagine being 90/10. The 90 equities will give you more passive income and much more gains than the 10 bonds. Your bonds will rise very quickly in relation to your equities.

livesoft
Posts: 59156
Joined: Thu Mar 01, 2007 8:00 pm

Re: question/idea about automatic rebalancing

Post by livesoft » Tue Feb 13, 2018 1:49 pm

I'm not quite sure what you mean by "gains" because you won't be getting (realizing) any gains unless you sell shares.

Yes, if you mean distributions (dividends), then what you have suggested is what many people do. However, the bond fund has monthly distributions while the equity fund has quarterly distributions. The amounts of the distributions will vary depending on the original amounts of the funds that they came from, too.
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CuriousBill
Posts: 4
Joined: Mon Feb 12, 2018 6:22 pm

Re: question/idea about automatic rebalancing

Post by CuriousBill » Tue Feb 13, 2018 2:06 pm

That is a really good point-Thanks!

To address that point I think one would want then to not invest all of each in the other but rather pick a fraction so that with the historical rates the allocation is constant.
Then the change only acts on fluctuations not on mean growth. I haven't worked it out but it seems like a simple calculus problem. If S(t) B(t) represent what they indicate with average growth rates a and b then wo rebalancing their growth satisfies S'=aS and B'=bB. Harvesting S and dumping it into B at a rate c (where c<a) and visa versa at a rate d (where d<b) gives
S'=aS -cS +dB and B'=bB +cS -dB
so the problem is: given a,b historical returns, find c,d so that S/[S+B] is the fixed stock allocation. I think this has a solution and if so would mean that on average at least the allocation would remain fixed and that it would deviate from the allocation only when one asset is very cheap while the other has just risen a lot.

Or--- one could just check it periodically- with necessary tweaks- does the idea make sense? To me it seems like a tax efficient and cheap way to do something like the Columbia Thermostat fund intends to do.

ps- I'm not claiming any revolutionary idea- just curious.

CuriousBill
Posts: 4
Joined: Mon Feb 12, 2018 6:22 pm

Re: question/idea about automatic rebalancing

Post by CuriousBill » Tue Feb 13, 2018 2:09 pm

and I mean 'gains' non-technically so not selling just whatever income is reinvested just send it to the other automatically.
and thanks!

wolf359
Posts: 1059
Joined: Sun Mar 15, 2015 8:47 am

Re: question/idea about automatic rebalancing

Post by wolf359 » Tue Feb 13, 2018 2:10 pm

Couldn't you simply buy a Vanguard LifeStrategy Fund which simply automatically rebalances for you? For example, LifeStrategy Growth maintains 80% stock 20% bonds.

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