Over Rebalancing.

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ram
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Over Rebalancing.

Post by ram »

In another thread forum member "Longinvest" has shown data supporting the need to rebalance in both directions. (upturn and downturns in stocks)
viewtopic.php?p=4179086#p4179086

He shows that a slightly less aggressive asset allocation at baseline rebalanced bidirectionally is superior to a slightly more aggressive non rebalanced or unidirectionally rebalanced asset allocation strategy.

The next logical question is:
Is a less aggressive portfolio at baseline which is overbalanced
superior or at least as good as
a slightly more aggressive fixed ratio asset allocation portfolio
(Both are re balanced bidirectionally)

For example.
A) 50/50 portfolio which changes to a 55(stock)/45 portfolio when SPX drops by 20% in one year and changes to 45/55 when SPX goes up by 30% in one year
B) A steady 55/45 portfolio
As noted above both are rebalanced bidirectionally. (I have no problem if other numbers are tested as long as the concept applies)
( Note : The up and down percentages for SPX are different as stocks are usually supposed to go up)

( Edit 1: added "in one year" to the 20% down and 30% up) (Edit 2 : added "or unidirectionally rebalanced")
Last edited by ram on Sun Mar 15, 2020 12:55 pm, edited 4 times in total.
Ram
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David Jay
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Re: Over Rebalancing.

Post by David Jay »

I don't know how this back-tests, but I have a philosophical problem with over-rebalancing.

Rebalancing is based on responding to past changes (and restoring the relative risk of a portfolio). Over-rebalancing is really a bet on the future direction of the market. I used to be a stock-picker and I am working hard on market humility - admitting that I really don't know more than the collective knowledge of the market. I am not willing to place a bet on the short term movements of the market - which is the effect of over-rebalancing.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Random Walker
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Re: Over Rebalancing.

Post by Random Walker »

Even for those of us who rigidly and humbly stick to a fixed asset allocation, the question arises how far to rebalance. To the specific target allocation? To the edge of a rebalancing band? Currently if one is taking from bonds to add to stocks, do you take enough to get all the way to target, or use less just to get to the edge of a band? Taxes can affect these decisions too.

Dave
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Re: Over Rebalancing.

Post by raisinsaregrapes »

I would be curious how back testing looks. My IPS does not address when to rebalance, but only target allocations. We are emotional beings, and if rebalancing can be an emotional outlet to market uncertainties I would like to see worst case scenario numbers. What are long term portfolio effects if you rebalance everyday vs every week vs only on the worst days you could have rebalanced? My thought is that the 20+ year effects are not very significant as long as target allocations are maintained. Anyone out there done the maths?

-Bob
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Eagle33
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Re: Over Rebalancing.

Post by Eagle33 »

raisinsaregrapes wrote: Sat Mar 14, 2020 3:47 pm I would be curious how back testing looks. My IPS does not address when to rebalance, but only target allocations. We are emotional beings, and if rebalancing can be an emotional outlet to market uncertainties I would like to see worst case scenario numbers. What are long term portfolio effects if you rebalance everyday vs every week vs only on the worst days you could have rebalanced? My thought is that the 20+ year effects are not very significant as long as target allocations are maintained. Anyone out there done the maths?

-Bob
Vanguard a research paper on rebalancing. A guide to smart rebalancing
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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ram
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Re: Over Rebalancing.

Post by ram »

Random Walker wrote: Sat Mar 14, 2020 3:46 pm Even for those of us who rigidly and humbly stick to a fixed asset allocation, the question arises how far to rebalance. To the specific target allocation? To the edge of a rebalancing band? Currently if one is taking from bonds to add to stocks, do you take enough to get all the way to target, or use less just to get to the edge of a band? Taxes can affect these decisions too.

Dave
At this point I am able to rebalance in the tax deferred account and I have rebalanced to the exact allocation ratio.
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Re: Over Rebalancing.

Post by Random Walker »

raisinsaregrapes wrote: Sat Mar 14, 2020 3:47 pm I would be curious how back testing looks. My IPS does not address when to rebalance, but only target allocations. We are emotional beings, and if rebalancing can be an emotional outlet to market uncertainties I would like to see worst case scenario numbers. What are long term portfolio effects if you rebalance everyday vs every week vs only on the worst days you could have rebalanced? My thought is that the 20+ year effects are not very significant as long as target allocations are maintained. Anyone out there done the maths?

-Bob
I think William Bernstein has discussed this some. I think he has said that because of momentum in the market, don’t rebalance too frequently, perhaps once every year or so.

Dave
confusedinvestor
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Re: Over Rebalancing.

Post by confusedinvestor »

Blackrock has a good example to Rebalancing

https://www.blackrock.com/americas-offs ... monitoring


Here is the Kitces article on Rebalancing

https://www.kitces.com/blog/best-opport ... bJy6a36nNU
Last edited by confusedinvestor on Sun Mar 15, 2020 1:11 pm, edited 1 time in total.
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ram
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Re: Over Rebalancing.

Post by ram »

Random Walker wrote: Sun Mar 15, 2020 12:47 pm
raisinsaregrapes wrote: Sat Mar 14, 2020 3:47 pm I would be curious how back testing looks. My IPS does not address when to rebalance, but only target allocations. We are emotional beings, and if rebalancing can be an emotional outlet to market uncertainties I would like to see worst case scenario numbers. What are long term portfolio effects if you rebalance everyday vs every week vs only on the worst days you could have rebalanced? My thought is that the 20+ year effects are not very significant as long as target allocations are maintained. Anyone out there done the maths?

-Bob
I think William Bernstein has discussed this some. I think he has said that because of momentum in the market, don’t rebalance too frequently, perhaps once every year or so.

Dave
On the other hand the Vanguard paper referenced above shows quarterly rebalancing at the 5% threshold has given best returns with no negative implications for volatility/risk. (3.5 or 4% thresholds were not tested)
Ram
TxInjun
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Re: Over Rebalancing.

Post by TxInjun »

David Jay wrote: Sat Mar 14, 2020 3:33 pm I don't know how this back-tests, but I have a philosophical problem with over-rebalancing.

Rebalancing is based on responding to past changes (and restoring the relative risk of a portfolio). Over-rebalancing is really a bet on the future direction of the market. I used to be a stock-picker and I am working hard on market humility - admitting that I really don't know more than the collective knowledge of the market. I am not willing to place a bet on the short term movements of the market - which is the effect of over-rebalancing.
Hello David,

In the spirit of discussion, I disagree

We are in the stock market because we expect it to go up over time. Inherently we have a future growth expectation for stocks if we’re invested in the market.

A reasonable person can look at crashing stock valuations, low bond yields and (subjectively) conclude that future stock returns should be superior.

There’s no guarantees, but within a 100% total allocation, can’t we see a path to an allocation shift in these times?

Respectfully,

TxIn
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Re: Over Rebalancing.

Post by DesertInvestor »

I know you can't time the market, but after this crash you can't say that the future in 5 years will not improve over the present situation. 3 years of gains evaporated. How can I say that increasing my stock allocation is essentially "market timing." Or decreasing it when overvalued is market timing. I would be your comfort level with a given asset allocation and that comfort level is influenced by how long a bull market has run and over valuations. Of course someone half way into the long bull could feel that way and would have missed out on some gains from the start until today. But again asset allocation is due to your risk tolerance and I feel my risk tolerances changes with conditions. Right now its going up with a 30% pullback.
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Re: Over Rebalancing.

Post by Redlion »

I prefer systematic approach re balancing at the beginning of the year, The market is swinging up and down 1000 to 2000 points day, No sense trying to time the market.
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WoodSpinner
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Re: Over Rebalancing.

Post by WoodSpinner »

Lots of ReBalancing threads .... :?

In the end, it has much less impact than you would expect.

Check out the analysis done in this post.

Emotional it does feel right to take advantage of a bargain, yet none of us knows when the next discount will occur. Also, where you are in the Investment Cycle is HUGE, I am 60 and Retired and in a much different place than someone 30 and working.

WoodSpinner
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Re: Over Rebalancing.

Post by rbaldini »

There is rampant overthinking on the topic of rebalancing. The purpose of rebalancing is to maintain a risk-reward tradeoff that you have decided is appropriate for you. When your AA gets too far off, you put it back to where you want it. Too many stocks = too much risk. Reduce. Not enough stocks = not enough return. Increase. That's it.
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Re: Over Rebalancing.

Post by Ged »

WoodSpinner wrote: Sat Mar 21, 2020 11:07 am Lots of ReBalancing threads .... :?

In the end, it has much less impact than you would expect.

Check out the analysis done in this post.

Emotional it does feel right to take advantage of a bargain, yet none of us knows when the next discount will occur. Also, where you are in the Investment Cycle is HUGE, I am 60 and Retired and in a much different place than someone 30 and working.

WoodSpinner
Yes, it matters. It also matters if you have won the game.

When I look at the Japanese Stock Market crash I become very wary of the idea of re-balancing into stocks. If we were to have a similar event the recovery time would be greater than my life expectancy.

So my IPS says rebalance by selling equities to age-10 in bonds yearly.

When I was younger I rebalanced both ways every 6 months.
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Re: Over Rebalancing.

Post by WoodSpinner »

rbaldini wrote: Sat Mar 21, 2020 11:14 am There is rampant overthinking on the topic of rebalancing. The purpose of rebalancing is to maintain a risk-reward tradeoff that you have decided is appropriate for you. When your AA gets too far off, you put it back to where you want it. Too many stocks = too much risk. Reduce. Not enough stocks = not enough return. Increase. That's it.
You make it sound so simple but I don’t think it is as easy as you make it out to be.

WoodSpinner
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Re: Over Rebalancing.

Post by confusedinvestor »

+ 1000

It is not easy, at least, not for me.
WoodSpinner wrote: Sat Mar 21, 2020 1:34 pm
rbaldini wrote: Sat Mar 21, 2020 11:14 am There is rampant overthinking on the topic of rebalancing. The purpose of rebalancing is to maintain a risk-reward tradeoff that you have decided is appropriate for you. When your AA gets too far off, you put it back to where you want it. Too many stocks = too much risk. Reduce. Not enough stocks = not enough return. Increase. That's it.
You make it sound so simple but I don’t think it is as easy as you make it out to be.

WoodSpinner
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Re: Over Rebalancing.

Post by tipswatcher »

I'm reading this thread because, obviously, I am considering re-balancing.

I looked at our asset allocation in December and it was basically on target, because we were at the level -- 35% stocks, 65% bonds -- that we have set as the target. In January, though, I removed some money from the stock allocation and set it into a Donor-Advised Fund, in a total bond market index. That probably shifted us "slightly" toward bonds.

We had been thinking about re-balancing in June and December each year. So here's the basic question: Is quarterly re-balancing too much? Or at least checking quarterly? That might mean March, June, September and December. Is that too much? Up until this point, we've had little issue staying near the 35/65 split we are seeking, but I suspect we are out of line now. (And I'd probably rather wait until April anyway. :happy)

And we aren't taking RMDs yet. Do people like to re-balance in January to fulfill RMDs from the correct asset classes?
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Re: Over Rebalancing.

Post by WoodSpinner »

tipswatcher wrote: Sat Mar 21, 2020 3:37 pm I'm reading this thread because, obviously, I am considering re-balancing.

I looked at our asset allocation in December and it was basically on target, because we were at the level -- 35% stocks, 65% bonds -- that we have set as the target. In January, though, I removed some money from the stock allocation and set it into a Donor-Advised Fund, in a total bond market index. That probably shifted us "slightly" toward bonds.

We had been thinking about re-balancing in June and December each year. So here's the basic question: Is quarterly re-balancing too much? Or at least checking quarterly? That might mean March, June, September and December. Is that too much? Up until this point, we've had little issue staying near the 35/65 split we are seeking, but I suspect we are out of line now. (And I'd probably rather wait until April anyway. :happy)

And we aren't taking RMDs yet. Do people like to re-balance in January to fulfill RMDs from the correct asset classes?
First if you Donated to a DAF the money is No Longer Yours and should not be counted in your Portfolio.

Take a look at the analysis on various ReBalancing schemes in this post. PortfolioVisualizer is a great tool and you can continue the analysis using your own allocations.

At this point having a plan you can follow is key.

FWIW, I am still working on a revision to mine—almost at a 5% rebalance band and not sure exactly what I am going to do. Also rethinking the floor I won’t rebalance below since I am Retired and using a LMP for part of the portfolio.

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Re: Over Rebalancing.

Post by tipswatcher »

First if you Donated to a DAF the money is No Longer Yours and should not be counted in your Portfolio.
Sure, I get that, but I would have been making these donations anyway out of my portfolio, and so the DAF is a set-aside for that purpose.

Thanks for the tip on the PortfolioVisualizer, I will definitely look into that.
TIPS: Perfect investment for imperfect times?
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