Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
nisiprius
Advisory Board
Posts: 35711
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by nisiprius » Wed May 16, 2018 7:48 am

How good are you at gauging what rebalancing will or will not do in a specific situation? I used PortfolioVisualizer to investigate this situation:

(Jan 2008 - Dec 2009)
60% Vanguard Total Stock Market Index Fund
40% Vanguard Total Bond Market Index Fund

I used the six options provided by PortfolioVisualizer:
No rebalancing
Rebalance annually
Rebalance semiannually
Rebalance quarterly
Rebalance monthly
Rebalance bands 5%/25%*

You can replicate my results by using this link, selecting each rebalancing option, and pressing "analyze portfolios."

Here is the challenge. I'll post the answers later, and of course you can find them out for yourself by using the link.

$10,000 was the starting balance at the start of 2008.
$9,313 was the ending balance, at the end of 2009, with no rebalancing.


1) Measured by ending balance, compared to not rebalancing:

a) None of the rebalancing regime helped. Not rebalancing gave the highest ending balance.
b) Some rebalancing regimes helped, but none made money--none exceeded $10,000, all resulted in losses over the two-year period
c) Many of the balancing regimes achieved a net profit instead of a net loss.

2) The difference between the lowest and highest balances, for the six different regimes (including no rebalancing) was:

a) $230
b) $579
c) $1,204
d) $2,553

3) Rebalancing has an effect on both return and risk. One measure of risk is standard deviation. Which of these following three charts correctly shows the standard deviation of the portfolio under each of the rebalancing regime?

a)
Image

b)
Image

c)
Image

*From the PortfolioVisualizer FAQ:
Rebalancing bands are also supported, and the default rebalancing bands are based on 5% absolute deviation from the target allocation (large allocations), or 25% relative deviation from the target allocation (small allocations). If the target allocation for an asset is 60%, then the absolute deviation threshold would trigger rebalancing when the asset's weight in the portfolio hits 65% or 55%. If the target allocation for an asset is 10%, then the relative deviation threshold would trigger rebalancing when the asset's weight in the portfolio hits 12.5% or 7.5%.
Last edited by nisiprius on Wed May 16, 2018 10:05 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
k66
Posts: 444
Joined: Sat Oct 27, 2012 1:36 pm

Re: Challenge: guess the effect of rebalancing in 2008-2009

Post by k66 » Wed May 16, 2018 9:07 am

I really only started taking classes in early 2008 and admittedly wasn't able to fully appreciate the lessons that were taught during the 2007 to 2008 semesters until much later. Still, I think I picked up some of the important class notes since then, but I'm just hoping to get 33% on this pop-quizz today!

1. a). Rebalancing doesn't necessarily improve return or risk (it may, but doesn't have to) and could easily result in "no effect" for a short interval like this one.

2. b). Answers c) and d) seem too high (>12%) and a) too low. $579 seems to be the Goldilocks answer.

3. a). Recognizing that "No Rebal" should have more risk (or higher sigma), then c) is out and a) seems somewhat plausible.
LOSER of the Boglehead Contest 2015 | lang may yer lum reek

livesoft
Posts: 60431
Joined: Thu Mar 01, 2007 8:00 pm

Re: Challenge: guess the effect of rebalancing in 2008-2009

Post by livesoft » Wed May 16, 2018 9:24 am

It would be nice to see some other controls. Below is an example of a pseudo-ideal rebalancing control:

I used morningstar.com and charted VSMGX (LifeStrategy Moderate Growth) from 12/31/2007 to 12/31/2009 (two years). $10,000 went to $8816.

But if I had 60% VTSAX (Total US Stock) and 40% VBTLX (Total US Bond) and rebalanced on March 6, 2009, then on 3/6/2009 from the starting $6,000 in VTSAX, one had $2862 and from the starting $4,000 in VBTLX one had $4186. A rebalance would put those at $4229 and $2819 which would then by 12/31/2009 have grown to $7163 and $3009, for a total of $10,172 or about $800 (8%) more than holding VTSAX and VBTLX without rebalancing for those 2 years.

One conclusion is that Portfolio Visualizer probably only looks at month-end numbers and doesn't see those intra-month ideal times to rebalance.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
nisiprius
Advisory Board
Posts: 35711
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Challenge: guess the effect of rebalancing in 2008-2009

Post by nisiprius » Wed May 16, 2018 9:44 am

livesoft wrote:
Wed May 16, 2018 9:24 am
...But if I had 60% VTSAX (Total US Stock) and 40% VBTLX (Total US Bond) and rebalanced on March 6, 2009...
Rebalancing at the exact day of a market bottom does work well. Investing in 11,18,37,46,55,45 in the Powerball lottery on March 6th, 2009 would have worked well, too.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

livesoft
Posts: 60431
Joined: Thu Mar 01, 2007 8:00 pm

Re: Challenge: guess the effect of rebalancing in 2008-2009

Post by livesoft » Wed May 16, 2018 9:46 am

As you already know, there are reasonably easy methods to figure out great days to rebalance. That is quite different from powerball.

One would not have to rebalance on the exact best day either. The day after or the second day after would have probably done wonders, too.

Also best day was probably March 9th and not March 6, 2009.

I think that 10% gain in VTSAX for the month of March 2009 was missed by your PortfolioVisualizer runs. Gain was 20+% from the March 9th low. Best days / Worst days are discussed often enough on the forum, so you know the drill.

My conclusion: Even when using 5/25, so don't look only on specific days on the calendar such as once a month, once a quarter, nor once a year.

My other conclusion: Any rebalancing studies that look only monthly, quarterly, or yearly are bogus.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
nisiprius
Advisory Board
Posts: 35711
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Challenge: guess the effect of rebalancing in 2008-2009

Post by nisiprius » Wed May 16, 2018 10:00 am

In response to your comment, I've changed the thread title to "Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009" to indicate that I looked only at the standard kinds of systematic rebalancing programmed into PortfolioVisualizer.
livesoft wrote:
Wed May 16, 2018 9:24 am
I used morningstar.com and charted VSMGX (LifeStrategy Moderate Growth) from 12/31/2007 to 12/31/2009 (two years). $10,000 went to $8816.
I, too, have used the LifeStrategy funds as general-purpose comparisons. and think they are reasonably fair examples of "Bogleheadish strategies." Tangentially, in this particular case, a better comparison would have been the Vanguard Balanced Index Fund, VBINX, which at that time was literally a fund-of-funds, holding Total Stock and Total Bond in a 60/40 ratio, rebalanced very frequently (nobody seems to know the exact system). I don't remember just what VSMGX was doing back then, I think their Asset Allocation fund was still in it, and, for whatever reason, pinned at 100% stocks. In Balanced Index, using Morningstar, $10,000 went to $9,313 which is well within the range of the results of rebalancing applied to VTSMX and VBMFX.

Reassuringly, PortfolioVisualizer gives the same answers, to the dollar, as Morningstar does, provided you set the starting date to 1/1/2008 in Morningstar. It ought to be 12/31/2007, I think, and therefore I think PortfolioVisualizer might be off by a day.

In any case, I definitely think you should write to PortfolioVisualizer and request that they add "RBD rebalancing" to their list of methods.

Source
Last edited by nisiprius on Wed May 16, 2018 10:07 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Jags4186
Posts: 2008
Joined: Wed Jun 18, 2014 7:12 pm

Re: Challenge: guess the effect of rebalancing in 2008-2009

Post by Jags4186 » Wed May 16, 2018 10:04 am

I've run this before and know the answers to 1 + 2

1) answer is B
2) answer is A
3) I would guess B

User avatar
randomizer
Posts: 1249
Joined: Sun Jul 06, 2014 3:46 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by randomizer » Thu May 17, 2018 10:02 am

I really don’t know but I’m subscribing to follow along.
75:25 AA / Expected retirement: 2097

AlohaJoe
Posts: 3197
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by AlohaJoe » Thu May 17, 2018 10:21 am

For #3 I'll pick c)

Mostly on the basis that that is the "wrong" answer according to Conventional Wisdom™ (rebalancing is supposed to reduce risk; volatility is risk; the one where you don't rebalance should have the highest risk & volatility) and you probably wouldn't be posting this if it were simply an affirmation of the Conventional Wisdom™.

User avatar
Kenkat
Posts: 4058
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Kenkat » Thu May 17, 2018 10:49 am

In looking into why exactly did the results come out the way they did, I experimented a little with the model. Instead of using the Year to Year model starting in Jan. 2008 and ending in Dec. 2009, I used the Month to Month model starting in Oct. 2008 and ending in Dec. 2009. My rationale - I am slow to rebalance so I know that I did not do any rebalancing between Jan. 2008 and Oct. 2008. Once the bottom fell out, I said “I better look into rebalancing” and I did so somewhat slowly over a few months.

Using the Month to Month model, you get different results. In this model, using rebalancing bands results in a higher final balance than no rebalancing. Just interesting that small variations in approach changes the final outcome.

User avatar
grayfox
Posts: 4857
Joined: Sat Sep 15, 2007 4:30 am

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by grayfox » Thu May 17, 2018 11:09 am

OK, I will play.

1. a) None of the rebalancing regime helped. Not rebalancing gave the highest ending balance.
2 a) $230
3. b)

:idea: I like how investors with 20/20 hindsight would have chosen a rebalancing method that would come out ahead. I'm going to assume they are joking. :D Ya got me!

lack_ey
Posts: 6456
Joined: Wed Nov 19, 2014 11:55 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by lack_ey » Thu May 17, 2018 1:36 pm

1) Measured by ending balance, compared to not rebalancing:

a) None of the rebalancing regime helped. Not rebalancing gave the highest ending balance.
b) Some rebalancing regimes helped, but none made money--none exceeded $10,000, all resulted in losses over the two-year period
c) Many of the balancing regimes achieved a net profit instead of a net loss.
---
All of the rebalancing should increase risk, increasing allocation to equities relative to no rebalancing, so while some are dumping in money to lose more money on the way down, I think overall I expect them to earn more, especially given the negative correlation between assets. Not enough to break $10k though, if no rebalancing had a loss of almost 7%.

If c) means that there's a net profit compared to no rebalancing but not that they beat $10k, then I would pick c). Some might have gotten unlucky, though. a) is pretty clearly wrong; I just need clarification on how c) is meant.

===
2) The difference between the lowest and highest balances, for the six different regimes (including no rebalancing) was:
a) $230
b) $579
c) $1,204
d) $2,553
---
Given that the baseline is 60%/40%, and the no-rebalancing case probably drops to as low as 40%/60% with something like $3000 stocks / $4000 bonds roughly (a bit lower than $3k and probably a bit higher than $4k), we're looking at differences probably within the realm of a few hundred or let's say $1000 of stocks at a given time between allocations.

Most allocations are going to miss rebalancing at the most opportune times and are going to do it multiple times at the wrong times or just miss the bottom by a lot.

So I figure the gains in calendar 2009, being what, like 30% or maybe a bit less on our difference of $1k stocks makes $230 seem a little more correct than $579. The other two, c) and d) are totally ridiculous.

===
3) Rebalancing has an effect on both return and risk. One measure of risk is standard deviation. Which of these following three charts correctly shows the standard deviation of the portfolio under each of the rebalancing regime?

a)https://imgur.com/R2a5G9I.png (15.37%, 15.27%, 15.08%, 15.02%, 14.78%, 13.50%)
b)https://imgur.com/QKo8AzC.png (19.90%, 14.78%, 13.82%, 12.82%, 12.42%, 13.58%)
c)https://imgur.com/an5U05r.png (13.5%, 14.78%, 15.02%, 15.27%, 15.37%, 15.08%)
---
This is the no-brainer. Rebalancing into stocks when stocks are dropping and vol is going crazy obviously increases standard deviation. The more frequent the rebalancing, the more exposed to equity beta during the downturn, so even higher risk. Rebalancing is directionally opposed to trend following in a sense.



edit: okay, now I'm taking a peek at what others have responded with, and wow

User avatar
Clever_Username
Posts: 1033
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Clever_Username » Thu May 17, 2018 6:11 pm

randomizer wrote:
Thu May 17, 2018 10:02 am
I really don’t know but I’m subscribing to follow along.
Me neither; I imagine there's some big benefit because of how far down the market went, plus there was that nice cache of 40% in bonds to rebalance from.

But then again, my understanding is that rebalancing is done for risk-management purposes and any additional gains are incidental.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

User avatar
nisiprius
Advisory Board
Posts: 35711
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by nisiprius » Thu May 17, 2018 8:33 pm

These are the correct answers. Drag your mouse
from here
vvvvvvvvvvvvvvvvvvvvvvvvv
lack_ey had them all correct.

1b) Some rebalancing regimes helped, but none made money--none exceeded $10,000, all resulted in losses over the two-year period. The actual numbers were:

No rebalancing 9,313
Rebalance annually 9,543
Rebalance semiannually, 9,420
Rebalance quarterly, 9,328
Rebalance monthly, 9,324
"Rebalance bands 5%/25%", $9,379

livesoft has noted that if you were able to rebalance once at the exact date of the bottom, your final balance would have been $10,172.


2) The difference between the lowest and highest balances, for the six different regimes (including no rebalancing) was:
a) $230 ($9,543 - $9,313

3) The correct chart for standard deviation is chart c.

No rebalancing 13.50%, -0.26
Rebalance annually 14.78%, -0.14
Rebalance semiannually, 15.02%, -0.28
Rebalance quarterly, 15.27%, -0.19
Rebalance monthly, 15.37%, -0.21
"Rebalance bands 5%/25%", 15.08%

Given the depth of the decline in 2008-2009, I would personally describe the effects of rebalancing "surprisingly small."


^^^^^^^^^^^^^^^^^^^^^^^
to here
to see them.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

lack_ey
Posts: 6456
Joined: Wed Nov 19, 2014 11:55 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by lack_ey » Fri May 18, 2018 12:19 am

Estimating the spread in returns was tough and honestly my gut feeling was off and I wasn't really sure there.

But I'm kind of disappointed somehow that people apparently don't understand what rebalancing does with respect to risk. Starting from near a market peak with a given allocation, of course rebalancing into stocks along the way down a market crash (and out of stocks on the way up) increases vol. Come on, people!

Do people only understand rebalancing as a kind of mantra or conceptualize it at too high a level as a risk management scheme? Maybe after this long bull market people haven't thought of the mechanics in a while when the market isn't going up.

Or actually maybe there's just not a realization that volatility of stocks is (1) not constant over time and (2) tends to clump together with one period's vol being decently predictive of next period's vol.

In any case, rebalancing is a tool for portfolio maintenance to keep allocations in line, more so than (fine-grained) risk management.

AlohaJoe
Posts: 3197
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by AlohaJoe » Fri May 18, 2018 12:33 am

lack_ey wrote:
Fri May 18, 2018 12:19 am
Do people only understand rebalancing as a kind of mantra
I think this is true not just for rebalancing but for many things in investing and life :happy Most of the time it kinda sorta mostly works.

lack_ey
Posts: 6456
Joined: Wed Nov 19, 2014 11:55 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by lack_ey » Fri May 18, 2018 12:35 am

AlohaJoe wrote:
Fri May 18, 2018 12:33 am
lack_ey wrote:
Fri May 18, 2018 12:19 am
Do people only understand rebalancing as a kind of mantra
I think this is true not just for rebalancing but for many things in investing and life :happy Most of the time it kinda sorta mostly works.
Life is simplifications and heuristics to make it through the day, huh.

User avatar
nisiprius
Advisory Board
Posts: 35711
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by nisiprius » Fri May 18, 2018 7:14 am

lack_ey wrote:
Fri May 18, 2018 12:19 am
Estimating the spread in returns was tough and honestly my gut feeling was off and I wasn't really sure there.

But I'm kind of disappointed somehow that people apparently don't understand what rebalancing does with respect to risk. Starting from near a market peak with a given allocation, of course rebalancing into stocks along the way down a market crash (and out of stocks on the way up) increases vol. Come on, people!

Do people only understand rebalancing as a kind of mantra or conceptualize it at too high a level as a risk management scheme? Maybe after this long bull market people haven't thought of the mechanics in a while when the market isn't going up.

Or actually maybe there's just not a realization that volatility of stocks is (1) not constant over time and (2) tends to clump together with one period's vol being decently predictive of next period's vol.

In any case, rebalancing is a tool for portfolio maintenance to keep allocations in line, more so than (fine-grained) risk management.
I think many people do take many investing maneuvers as oversimplified mantras, without forming realistic expectations. And other people feed into this by focussing too much on better or worse, win or loss, up or down, without considering "by how much." It is the Olympics model of evaluation: the gold medal is the same no matter what the difference in performance is.

In this forum, expense ratios and low costs are often a mindless mantra. The difference between 1.25% and 0.25% really matters; between 0.25% and 0.05% not so much (one fifth as much, to be precise).

High-dividend stock investing is another interesting one. I think this is a mantra and one that persists from the 1970, when people invested in individual stock portfolios, the fixed commission on any trade was generally well over $100, and the only sensible way to get monthly income payments from a stock portfolio was to invest in dividend-paying stocks.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

livesoft
Posts: 60431
Joined: Thu Mar 01, 2007 8:00 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by livesoft » Fri May 18, 2018 7:25 am

And folks even jump to conclusions. I showed one.single. rebalancing earlier in this thread. Some folks assumed that was the best possible time to rebalance. It was not the best time to rebalance. And perhaps rebalancing twice or thrice or whatever would give better results.

It has been shown in other threads that math is relentless. For instance, suppose one made an extra 5% on 10% of their portfolio. Maybe they invested in a momentum ETF or a small-cap value fund or avoided investing in a bond fund that lost 5%. Well, 5% of 10% is just 0.5%. So their overall portfolio performance would be only 0.5% better relative to not making an extra 5% on 10% of their portfolio.

And by the same math, suppose one lost an extra 5% on 10% of their portfolio. Their overall portfolio performance would be only 0.5% worse relative to not losing an extra 5% on 10% of their portfolio.

But these 0.5% here and -0.5% there can add up over time. That's why paying attention to expense ratios, taxes, advisor fees, rebalancing and avoiding behavioral mistakes are important in the long run. For many it can be the little things that cost them once all the big things are taken care of.
Wiki This signature message sponsored by sscritic: Learn to fish.

indexonlyplease
Posts: 975
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by indexonlyplease » Fri May 18, 2018 7:33 am

ok questions.

So in conclusion somone with the 3 fund portfolio with the fixed income in the stable value fund is ok to just balance once a year. (me and this is what I have been doing).

This keeps my AA correct is the main reason for me doing this. I could easily not care about reballancing and let the market take care of but I guess my AA could get way off course. Not sure if would matter to me.

Also, if the market did take a big correction that I would notice when the sceeming starts, it would be time to reballance to take advantage of cheeper stock funds?????

drzzzzz
Posts: 178
Joined: Sat Sep 22, 2012 9:56 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by drzzzzz » Fri May 18, 2018 9:17 am

Vanguard had a white paper on rebalancing back in 2015 https://www.vanguard.com/pdf/ISGPORE.pdf
and their conclusions which are below were similar:
"Just as there is no universally optimal asset allocation,
there is no universally optimal rebalancing strategy. The
only clear advantage so far as maintaining a portfolio’s
risk-and-return characteristics is that a rebalanced
portfolio more closely aligns with the characteristics of
the target asset allocation than with a never-rebalanced
portfolio. As our analysis has shown, the risk-adjusted
returns are not meaningfully different whether a portfolio
is rebalanced monthly, quarterly, or annually; however,
the number of rebalancing events and resulting costs
increase significantly. As a result, we conclude that a
rebalancing strategy based on reasonable monitoring
frequencies (such as annual or semiannual) and
reasonable allocation thresholds (variations of 5%
or so) is likely to provide sufficient risk control relative
to the target asset allocation for most portfolios with
broadly diversified stock and bond holdings, without
creating too many rebalancing events over the long term."

My take is that if you are bored, rebalance once or twice a year and that rebalancing is overrated except to reduce increasing risk from a larger and larger percentage of stocks in your portfolio.

livesoft
Posts: 60431
Joined: Thu Mar 01, 2007 8:00 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by livesoft » Fri May 18, 2018 9:45 am

indexonlyplease wrote:
Fri May 18, 2018 7:33 am
ok questions.

So in conclusion somone with the 3 fund portfolio with the fixed income in the stable value fund is ok to just balance once a year. (me and this is what I have been doing).

This keeps my AA correct is the main reason for me doing this. I could easily not care about reballancing and let the market take care of but I guess my AA could get way off course. Not sure if would matter to me.

Also, if the market did take a big correction that I would notice when the sceeming starts, it would be time to reballance to take advantage of cheeper stock funds?????
1. Define what you mean when you say "is ok". If you mean match the annualized performance of a similar asset class target date or LifeStrategy fund within plus-or-minus 2% over the long term, then Yes, OK to rebalance once a year.

And as an example, take a look Vanguard Wellington VWENX with its 65% equities / 35% stocks this year compared to Vanguard Retirement 2025 with its 63/37 AA. The performances so far in 2018 are -0.43% and 0.65%. So that's a 1% difference in performance in just half a year which is about all the precision that most people can expect with their own personal portfolio performance.

2. Yes, you would notice when the screaming starts.
Wiki This signature message sponsored by sscritic: Learn to fish.

indexonlyplease
Posts: 975
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by indexonlyplease » Fri May 18, 2018 6:25 pm

livesoft wrote:
Fri May 18, 2018 9:45 am
indexonlyplease wrote:
Fri May 18, 2018 7:33 am
ok questions.

So in conclusion somone with the 3 fund portfolio with the fixed income in the stable value fund is ok to just balance once a year. (me and this is what I have been doing).

This keeps my AA correct is the main reason for me doing this. I could easily not care about reballancing and let the market take care of but I guess my AA could get way off course. Not sure if would matter to me.

Also, if the market did take a big correction that I would notice when the sceeming starts, it would be time to reballance to take advantage of cheeper stock funds?????
1. Define what you mean when you say "is ok". If you mean match the annualized performance of a similar asset class target date or LifeStrategy fund within plus-or-minus 2% over the long term, then Yes, OK to rebalance once a year.

And as an example, take a look Vanguard Wellington VWENX with its 65% equities / 35% stocks this year compared to Vanguard Retirement 2025 with its 63/37 AA. The performances so far in 2018 are -0.43% and 0.65%. So that's a 1% difference in performance in just half a year which is about all the precision that most people can expect with their own personal portfolio performance.

2. Yes, you would notice when the screaming starts.
What I was trying to ask is it ok to reballance once a year. Or some reballacing bands make a different. Just trying to clarify what is the best way to reballance.

User avatar
willthrill81
Posts: 4036
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by willthrill81 » Fri May 18, 2018 6:36 pm

Based on this single period, it seems that rebalancing may not be as important as many proclaim. Why the myth of the 'rebalancing bonus' persists, I don't understand.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

livesoft
Posts: 60431
Joined: Thu Mar 01, 2007 8:00 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by livesoft » Fri May 18, 2018 6:55 pm

indexonlyplease wrote:
Fri May 18, 2018 6:25 pm
What I was trying to ask is it ok to reballance once a year. Or some reballacing bands make a different. Just trying to clarify what is the best way to reballance.
There is no best way to rebalance.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Kevin M
Posts: 9427
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Kevin M » Fri May 18, 2018 7:16 pm

Not going to guess answers to the specific questions, but without peeking or using PV, I'm going to guess that annual rebalancing had the highest return. The reason for this guess is that the market bottom was in early March 2009, so if you rebalanced in early January, you did only one purchase closer to the bottom, but I recall (again, without looking), that stocks were significantly higher in early January, so it might not be as good as I'm guessing.

I think the worst performers would have been rebalancing more frequently, like monthly or quarterly, or even with 5/25 bands, since you were buying multiple times on the way down, and then buying gradually on the way up. I would guess that buying once closer to the bottom would have done better.

Now I'll read on to see if at least this guess is correct.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

JustinR
Posts: 567
Joined: Tue Apr 27, 2010 11:43 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by JustinR » Sat May 19, 2018 1:20 am

indexonlyplease wrote:
Fri May 18, 2018 6:25 pm
What I was trying to ask is it ok to reballance once a year. Or some reballacing bands make a different. Just trying to clarify what is the best way to reballance.
Rebalancing once a year is sufficient. There's no real need to do it more than that. Read Vanguard's study on this: https://personal.vanguard.com/pdf/ISGPORE.pdf

So yes, it's "ok" to rebalance once a year.

User avatar
Lieutenant.Columbo
Posts: 1114
Joined: Sat Sep 05, 2015 9:20 pm
Location: Los Angeles CA

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Lieutenant.Columbo » Sat May 19, 2018 8:03 am

JustinR wrote:
Sat May 19, 2018 1:20 am
Rebalancing once a year is sufficient. There's no real need to do it more than that
does this mean that when one rebalances once a year, one shouldn't also rebalance in between two annual rebalances if market changes are significant? thank you
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

JustinR
Posts: 567
Joined: Tue Apr 27, 2010 11:43 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by JustinR » Sat May 19, 2018 3:44 pm

Lieutenant.Columbo wrote:
Sat May 19, 2018 8:03 am
JustinR wrote:
Sat May 19, 2018 1:20 am
Rebalancing once a year is sufficient. There's no real need to do it more than that
does this mean that when one rebalances once a year, one shouldn't also rebalance in between two annual rebalances if market changes are significant? thank you
Yes. Rebalance once a year only, regardless of what the market does inbetween.

So pick a date. Let's say May 15. On May 15 each year, you rebalance. Don't rebalance for the rest of the year. Of course, you can always "rebalance" with new money invested during the rest of the year.

Vanguard also suggests only rebalancing using 5% bands. So on May 15, only rebalance a fund if its allocation is off by 5% of what it should be. Otherwise just leave it alone. Whether you follow this rule is up to you.

User avatar
Lieutenant.Columbo
Posts: 1114
Joined: Sat Sep 05, 2015 9:20 pm
Location: Los Angeles CA

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Lieutenant.Columbo » Sat May 19, 2018 7:45 pm

JustinR, just to be sure I understood completely, when you said...
JustinR wrote:
Sat May 19, 2018 3:44 pm
Whether you follow this rule is up to you.
were you referring to this rule...
JustinR wrote:
Sat May 19, 2018 1:20 am
Rebalance once a year only, regardless of what the market does inbetween.
or to this rule...
JustinR wrote:
Sat May 19, 2018 1:20 am
only rebalance a fund if its allocation is off by 5% of what it should be.
?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

JustinR
Posts: 567
Joined: Tue Apr 27, 2010 11:43 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by JustinR » Sat May 19, 2018 8:03 pm

Lieutenant.Columbo wrote:
Sat May 19, 2018 7:45 pm
JustinR, just to be sure I understood completely, when you said...
JustinR wrote:
Sat May 19, 2018 3:44 pm
Whether you follow this rule is up to you.
were you referring to this rule...
JustinR wrote:
Sat May 19, 2018 1:20 am
Rebalance once a year only, regardless of what the market does inbetween.
or to this rule...
JustinR wrote:
Sat May 19, 2018 1:20 am
only rebalance a fund if its allocation is off by 5% of what it should be.
?
Thank you.
The second one (using bands). Some people use bands, some don't.

By the way just to clarify none of this is a "rule"...it's just a recommendation. Vanguard is just saying "rebalancing once or twice a year is enough...any more is a waste of time and money."

Stick to your plan and there's no need to keep fidgeting with it during the year.

uuuuu
Posts: 16
Joined: Mon Sep 28, 2015 6:30 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by uuuuu » Sat May 19, 2018 8:36 pm

I just did some calculations myself maybe two weeks ago and came up with some similar conclusions. Very timely and relevant thread for me, thanks for posting.

User avatar
grabiner
Advisory Board
Posts: 21925
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by grabiner » Sun May 20, 2018 10:50 am

The reason that no rebalancing led to the lowest standard deviation is that it had the lowest average stock allocation. The portfolio with no rebalancing had 40% stock in March 2009; any portfolio which rebalanced along the way had more than 40% stock, and thus had larger gains during the 2009 recovery, leading to a larger standard deviation. If the same study were done in 2007-2008, the no-rebalancing portfolio would have the highest standard deviation.

Over a longer time period, unrebalanced portfolios tend to have higher returns than rebalanced portfolios with the same starting allocation. A portfolio which starts at 60% stock and ends at 80% stock should be expected to outperform a portfolio which starts at 60% stock and is rebalanced to that level. But a more fair comparison would be between the unrebalanced portfolio which averages 70%, and a rebalanced portfolio which is always at 70%; the returns should be similar but the unrebalanced portfolio will have more risk. (That effect didn't show up in the 2008-2009 study because stock and bond returns weren't that far apart.)
Wiki David Grabiner

Atilla
Posts: 1213
Joined: Tue Feb 09, 2010 7:44 pm

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Atilla » Sun May 20, 2018 10:59 am

Cool - I feel good about how I handled that time period. Never panicked and sold, but never re balanced either.

Turns out that was a perfectly fine strategy. :sharebeer
The Village Idiot - here for your entertainment.

User avatar
nisiprius
Advisory Board
Posts: 35711
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by nisiprius » Sun May 20, 2018 11:01 am

One obvious reason for rebalancing, the one I think everyone agrees on, is that if you have chosen, say, a 40/60 asset allocation based on your risk tolerance, and you do nothing, and it drifts to 70/30, you have probably exceeded your risk tolerance and you should have done something about it. (In the past, that kind of drift happens slower than people imagine, and doesn't require even annual rebalancing, even during the 1995-2000 bull market). Let's set that aside.

Some questions about more frequent rebalancing, and/or rebalancing according to various rules, are:

1) Is it beneficial? In what way, exactly?
2) Is it almost always beneficial, or is it just a slim statistical edge that only shows up reliably in the long term?
3) Just how beneficial is it?

And, conceptually:
4) Does rebalancing manufacture extra return out of pure random volatility, or does the benefit depend on assets showing active mean reversion?
5) Do people unconsciously imagine that rebalancing rules will fire mostly close to the bottom, and fail to have an accurate mental picture of the effect of more or less randomly firing many times, going both down and up?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
Kevin M
Posts: 9427
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Challenge: guess the effect of rebalancing (by interval or bands) in 2008-2009

Post by Kevin M » Sun May 20, 2018 4:11 pm

I always like to take another look when dollar differences seem small when looking at relatively small dollar amounts.

If you scale it up by 100, so starting with $1,000,000 instead of $10,000, the difference between annual rebalancing and monthly rebalancing would have been $21,900 (in favor of annual rebalancing).

Probably a better way to look at it is as a percentage difference. By rebalancing annually you would have ended up with 2.35% more than by rebalancing monthly. That's still not much when you're looking at recovering from a decline of more than 50%. I figured it would have been more (and that was my guess), but I probably would have guessed that the percentage difference would have been larger.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Post Reply