I thought rebalancing was supposed to control risk - but it hasn't since 2000
I thought rebalancing was supposed to control risk - but it hasn't since 2000
Using Portfolio Visualizer to dissect the performance of a portfolio allocation of 50% TSM + 50% Intermediate Treasuries from 2000-2018. I compared returns for the period 2000-2018 and found that rebalancing didn't seem to control portfolio risk over the last 18 years, during which there were two significant equity bear markets:
Rebalancing_____ CAGR ____ SD ______Max Drawdown ______ Sharpe
5%/25% Rule......5.66%......7.01%........ (-23.41%)............... 0.59
Annual...............5.83%......6.84%.........(-21.63%)................0.63
None..................5.21%......5.56%.........(-14.06%)................0.65
Both annual and 5/25 rebalancing produced somewhat higher returns but with higher volatility and larger max drawdowns than not rebalancing. Go Figure.
Rebalancing_____ CAGR ____ SD ______Max Drawdown ______ Sharpe
5%/25% Rule......5.66%......7.01%........ (-23.41%)............... 0.59
Annual...............5.83%......6.84%.........(-21.63%)................0.63
None..................5.21%......5.56%.........(-14.06%)................0.65
Both annual and 5/25 rebalancing produced somewhat higher returns but with higher volatility and larger max drawdowns than not rebalancing. Go Figure.
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Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
The title's broad claim is not sufficiently supported by the single portfoliovisualizer run.
For example, different results are found for Jan 2003 - Dec 2017.
For example, different results are found for Jan 2003 - Dec 2017.
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Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
Rebalancing stabilizes risk near a certain level, and does not allow it to fluctuate as market prices fluctuate. You picked a start date that was near a market peak, and so I suspect the rebalancing portfolios have significantly more equity exposure during the first bear market. Had you picked a start date just after the first bear market you included, I think you'll find that the rebalanced portfolios would do much better in the 2008 crisis.
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Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
As we know, there are three kinds of lies. Lies, damned lies, and backtesting.
RM
RM
I figure the odds be fifty-fifty I just might have something to say. FZ
Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
Instead of just picking 2000-2018 which is just an arbitrary turn of the century start point, you need to do this:
* Run all numbers for 10/11/12/.../38/39/40 year periods
* Run all numbers for every starting year possible.
* Count # of periods where rebalancing reduced returns
* Count # of periods where rebalancing increased returns
* Count # of periods where rebalancing reduced volatility
* Count # of periods where rebalacning increased volatility
* The average reduction/increase in returns versus average reduction/increase in volatility.
* Show the worse 10 cases for rebalancing.
* Show the best 10 cases for rebalancing.
To do the above, you won't be able to do this by hand but what you can do is program a script to run something like wget to hit Portfolio Visualizer to get the numbers, parse from HTML (or if PV can do XML or JSON) and put in a database where you can then compile the numbers.
* Run all numbers for 10/11/12/.../38/39/40 year periods
* Run all numbers for every starting year possible.
* Count # of periods where rebalancing reduced returns
* Count # of periods where rebalancing increased returns
* Count # of periods where rebalancing reduced volatility
* Count # of periods where rebalacning increased volatility
* The average reduction/increase in returns versus average reduction/increase in volatility.
* Show the worse 10 cases for rebalancing.
* Show the best 10 cases for rebalancing.
To do the above, you won't be able to do this by hand but what you can do is program a script to run something like wget to hit Portfolio Visualizer to get the numbers, parse from HTML (or if PV can do XML or JSON) and put in a database where you can then compile the numbers.
Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
And there is also the risk of missing out on higher returns -- the unrebalanced portfolio also had a significantly lower return.
Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
I wonder how regular persistent new investments via automatic payroll deduction affects the impact of wholesale rebalancing. In other words, if you are continuously adding new investments at your target asset allocation, twice a month or whatever, while the market is simultaneously fluctuating around those, there is an incremental form of regular rebalancing going on.
I suppose the answer varies depending on the relative percentage of the new contributions compared to total portfolio value, and on the market's volatility during the measurement period.
Most rebalancing studies seem to use a lump sum initial investment, and letting the market fluctuate around that, for an extended period. But that doesn't represent the way most people invest.
So it seems like the impact of rebalancing is very much a case-by-case influence.
I suppose the answer varies depending on the relative percentage of the new contributions compared to total portfolio value, and on the market's volatility during the measurement period.
Most rebalancing studies seem to use a lump sum initial investment, and letting the market fluctuate around that, for an extended period. But that doesn't represent the way most people invest.
So it seems like the impact of rebalancing is very much a case-by-case influence.
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Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
Rebalancing is supposed to "control" risk as in maintaining a risk profile. That doesn't mean "reduce risk"
Not sure what is so complicated about the concept of rebalancing that people have such hard time with??
Not sure what is so complicated about the concept of rebalancing that people have such hard time with??
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Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
That’s way too much work if all you wanted was a click-bait headline.MossySF wrote: ↑Tue Nov 20, 2018 3:11 am To do the above, you won't be able to do this by hand but what you can do is program a script to run something like wget to hit Portfolio Visualizer to get the numbers, parse from HTML (or if PV can do XML or JSON) and put in a database where you can then compile the numbers.
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Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
You cannot control risk. You can influence it.
The outcome of a cherry-picked timeline has no bearing on maintaining one's preferred allocation, which is a crude method of risk influence.
Influencing risk does not mean eliminating it. At any point in the timeline the risk can, as the phrase is here, show up. Then it hurts you.
PJW
The outcome of a cherry-picked timeline has no bearing on maintaining one's preferred allocation, which is a crude method of risk influence.
Influencing risk does not mean eliminating it. At any point in the timeline the risk can, as the phrase is here, show up. Then it hurts you.
PJW
Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
Haha, you know 5+ years ago, I took the bait all the time.TropikThunder wrote: ↑Tue Nov 20, 2018 11:01 amThat’s way too much work if all you wanted was a click-bait headline.MossySF wrote: ↑Tue Nov 20, 2018 3:11 am To do the above, you won't be able to do this by hand but what you can do is program a script to run something like wget to hit Portfolio Visualizer to get the numbers, parse from HTML (or if PV can do XML or JSON) and put in a database where you can then compile the numbers.
I'd find sources of historic data, put them in a database, run all permutations ... and have zero effect on the conversation since most people enter these threads to post evidence supporting their positions.
Now that I'm a crusty "get off my lawn" forum veteran, I leave the hard work for others.
Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
From an analytical perspective, shouldn’t the same analysis apply for a lump sum and the additional investments? Each new investment in your scenario could be treated as a distinct lump sum, so the analysis for a lump sum would apply to all new investments.Tamales wrote: ↑Tue Nov 20, 2018 9:12 am I wonder how regular persistent new investments via automatic payroll deduction affects the impact of wholesale rebalancing. In other words, if you are continuously adding new investments at your target asset allocation, twice a month or whatever, while the market is simultaneously fluctuating around those, there is an incremental form of regular rebalancing going on.
I suppose the answer varies depending on the relative percentage of the new contributions compared to total portfolio value, and on the market's volatility during the measurement period.
Most rebalancing studies seem to use a lump sum initial investment, and letting the market fluctuate around that, for an extended period. But that doesn't represent the way most people invest.
So it seems like the impact of rebalancing is very much a case-by-case influence.
The question seems to be whether the new investments have a behavioral impact that changes the optimum strategy. For example, rebalancing by directing new investments to the down portion could be more or less behavioraly helpful, or taking on more risk in a small portfolio because of larger future contributions might be possible.
Re: I thought rebalancing was supposed to control risk - but it hasn't since 2000
Agree. Sometimes rebalancing actually increases the riskiness of a portfolio, as when stocks have fallen and your % allocation has dropped and you add more to bring the allocation back up.WonderingDope wrote: ↑Tue Nov 20, 2018 9:21 am Rebalancing is supposed to "control" risk as in maintaining a risk profile. That doesn't mean "reduce risk"
Not sure what is so complicated about the concept of rebalancing that people have such hard time with??
Of course, we can debate the merits of buying more stock when stocks are tanking. Mr. Efficient Market has said that stocks have become worth less and it's always risky to argue with him about this.
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