(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:
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:
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?
*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%.