when to rebalance?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
gips
Posts: 473
Joined: Mon May 13, 2013 5:42 pm

when to rebalance?

Post by gips » Sat Apr 21, 2018 8:04 pm

I'm having a hard time figuring out reasonable bands for rebalancing.

for example, my target asset allocation is 40-60 equities to fixed income. I'm currently sitting at 45-55. My pre-tax space is completely full of fixed income, so rebalancing would incur a large long-term cap gain bill. And were I to rebalance, given recent market volatility, I might find myself with another cap gain to rebalance back into eqquities. otoh, who knows where the market is going tomorrow and the idea of taking some equity $ off the table is appealing.

Is there a body of thought around optimal rebalancing ranges?

RadAudit
Posts: 3026
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: when to rebalance?

Post by RadAudit » Sat Apr 21, 2018 8:15 pm

Well, 5% + / - off of AA targets is used by a number of folks as the place to start rebalancing for an AA close to yours.

And, yes there is a body of thought about rebalancing. I'm just not sure there is a consensus.

Of course, no one said how fast you have to rebalance. Can you rebalance with new contributions and / or by redirecting dividends and interest?
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

User avatar
fortyofforty
Posts: 1104
Joined: Wed Mar 31, 2010 12:33 pm

Re: when to rebalance?

Post by fortyofforty » Sat Apr 21, 2018 8:46 pm

You might want to give this a look. It's from Vanguard's research division.

Best practices for portfolio rebalancing
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

User avatar
jimmyq
Posts: 157
Joined: Wed Apr 17, 2013 6:34 pm

Re: when to rebalance?

Post by jimmyq » Sat Apr 21, 2018 9:06 pm

I was in the same boat recently. Didn't have any more room in my tax advantaged accounts to rebalance, so I bit the bullet and rebalanced in my taxable account. If you do this, you can try to minimize the tax hit by first selling shares that have appreciated the least in order to reduce capital gains. If you are uncomfortable rebalancing 5% right now, then take baby steps and rebalance half that amount now, and then the other half in 6 months.

User avatar
laidback_and_relaxed
Posts: 47
Joined: Fri Jun 12, 2015 2:16 pm
Location: San Jose, CA

Re: when to rebalance?

Post by laidback_and_relaxed » Sun Apr 22, 2018 3:50 am

I've recently "retired" and started relying on my investment portfolio and a few other sources for income (de-accumulating). I was targeting a 66/34 AA and ended up closer to a 69/31 AA for starters, due to the recent gains in stocks.

I'm of the school that believes in rebalancing infrequently and in small increments. I've even considered not rebalancing ever. Several studies back up such a de-accumulation strategy as being optimal, but who knows. The plan is to spend my LMP of bonds, my bond ladder (and cash), over the next 10 years, which will increase my AA in stocks to near 100%. I think I will end up rebalancing at some point, and maintain some amount of cushion in bonds and cash at the tail end of these 1st 10 years, but we'll see. I'll stay "data dependent".

Why the mantra for annual rebalancing or when your AA allocation varies outside of a "band"? I think we tend to over engineer our investment and spending strategies where in most cases such alterations make little if any difference, just my humble opinion. Rebalance every 5 years? 10 years?

JustinR
Posts: 689
Joined: Tue Apr 27, 2010 11:43 pm

Re: when to rebalance?

Post by JustinR » Sun Apr 22, 2018 3:52 am

Vanguard says "5% bands, once a year" is reasonable, and I agree. That's what I do and I think a lot of people here.

User avatar
Doc
Posts: 8589
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: when to rebalance?

Post by Doc » Sun Apr 22, 2018 7:42 am

I don't know if there is an "optimum" strategy. Probably not. Just pick one of those that has wide support and write it up in your investment strategy statement.

What you don't to want to do is get yourself in jimmyq's position of worrying about it when the time comes and therefore fail to do it at all.

FWIW I use 5% "squishy" bands. The squishy part is that if my AA drops by 5% over a short period I won't wait for it to actually hit the lower limit to start buying. But I have that written down.
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.

User avatar
House Blend
Posts: 4492
Joined: Fri May 04, 2007 1:02 pm

Re: when to rebalance?

Post by House Blend » Sun Apr 22, 2018 8:50 am

gips wrote:
Sat Apr 21, 2018 8:04 pm
for example, my target asset allocation is 40-60 equities to fixed income. I'm currently sitting at 45-55. My pre-tax space is completely full of fixed income, so rebalancing would incur a large long-term cap gain bill. And were I to rebalance, given recent market volatility, I might find myself with another cap gain to rebalance back into eqquities. otoh, who knows where the market is going tomorrow and the idea of taking some equity $ off the table is appealing.
Given that rebalancing from equity to fixed income for you carries tax costs, IMO you shouldn't do it very often. (I will intentionally leave how often is "very often" unspecified.) And if you do rebalance, do just enough to make it acceptable. Ex. with 5% bands centered at 40%, when you hit 45% you might rebalance just enough to get to 44%.

(And of course you should be using SpecID, to minimize those tax costs.)

(Also of course, you should not be auto-reinvesting dividends. Take them in cash.)

Let me add that with a 40/60 portfolio and 100% of tax-deferred in fixed income it seems that you are probably retired, or will be soon. In that case, it should be worthwhile to reassess why you have a particular targeted allocation in the first place, and whether there is a wider range of allocations that are acceptable. For example, a typical over-saving retired Boglehead with a microscopically small withdrawal rate can use just about any low cost balanced portfolio and do fine with or without rebalancing.

(A sign that you are in this category, assuming that you are retired, is that you are only using the taxable account for its dividends, and never selling shares.)

If that is the case, you should be questioning whether it makes sense to pay taxes just so that your portfolio stays within certain ranges, given that those ranges have minimal effect on your ability to finance your retirement.

retiredjg
Posts: 33831
Joined: Thu Jan 10, 2008 12:56 pm

Re: when to rebalance?

Post by retiredjg » Sun Apr 22, 2018 9:04 am

Keep in mind that you don't have to rebalance all the way back to 40% stock. You can trim about 2%, pay less tax, and still be in your band with a touch to spare.

michaeljc70
Posts: 3556
Joined: Thu Oct 15, 2015 3:53 pm

Re: when to rebalance?

Post by michaeljc70 » Sun Apr 22, 2018 9:45 am

I rebalance on my birthday annually (try to avoid end of year/beginning of year fluctuations) if it requires selling/buying. If it is new money, of course I just put it to where it would put me closest to my AA.

I previously used bands, but then you are checking stuff all the time. Annual can also reduce transaction costs (if people still have those) and taxes (if in taxable accounts). I do believe it is slightly more risky picking a longer rebalancing period, but there can also be more reward (letting bull market run longer in an asset).

Keep in mind when talking about bands and percents, there are two different "methods" - absolute and relative. Some (most) people say 5% band meaning that if you want 60% equities you rebalance when it gets to 55% or 65%. Others use a relative band. A 10% relative band would mean 60% * .1 = 6% movement (54% or 66%) would require reallocating. A relative band makes more sense to me if you have some asset classes with smaller allocations.

3funder
Posts: 712
Joined: Sun Oct 15, 2017 9:35 pm

Re: when to rebalance?

Post by 3funder » Sun Apr 22, 2018 9:49 am

Rebalancing annually is thought to be sufficient; you should also rebalance if a change in your personal circumstances warrants doing so.

User avatar
fortyofforty
Posts: 1104
Joined: Wed Mar 31, 2010 12:33 pm

Re: when to rebalance?

Post by fortyofforty » Sun Apr 22, 2018 9:54 am

There was an assumption stated that stocks will gain in proportion compared with bonds, in the portfolio. We don't know that for sure, even though it's not an unreasonable assumption. There is a chance that stocks won't move closer to 100% in the time frame stated. Prepare for all eventualities.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

gips
Posts: 473
Joined: Mon May 13, 2013 5:42 pm

Re: when to rebalance?

Post by gips » Sun Apr 22, 2018 5:01 pm

thanks for all the thoughtful replies. I should have added in my op that I'm retired. in any case, I have to think more about it, but I like the idea of 2-3 percent.

best,

Post Reply