Share your Re-Balancing Strategy

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Kookaburra
Posts: 168
Joined: Thu Apr 02, 2020 11:14 pm

Share your Re-Balancing Strategy

Post by Kookaburra » Sun May 03, 2020 2:01 pm

Hello Bogleheads

I am reviewing my IPS and the section on re-balancing has always been a weak spot in terms of my understanding of best practices.

I realize re-balancing too often is detrimental (plus, I prefer less tinkering overall). However, the rigidity of a fixed schedule (e.g. once per year) might miss out on opportunities when the market is highly volatile as recently occurred with a 30% drop and rebound.

I’m hoping to learn from the wise folks on this forum. In that spirit, would folks mind sharing their written or unwritten re-balancing strategies? I’m focused on major asset classes (stocks vs bonds). It’s all fair game: fixed schedule, 5/25 rule, fixed frequency PLUS deviation, opportunistic when the market drops by X% over Y days, etc.

Thank you

Triple digit golfer
Posts: 5333
Joined: Mon May 18, 2009 5:57 pm

Re: Share your Re-Balancing Strategy

Post by Triple digit golfer » Sun May 03, 2020 2:16 pm

Three fund portfolio

New money goes into lagging fund.
Rebalance by exchanging only when a fund is 5% out of balance or more.
Nothing more, nothing less.

User avatar
happysteward
Posts: 182
Joined: Tue Jun 16, 2015 11:42 am

Re: Share your Re-Balancing Strategy

Post by happysteward » Sun May 03, 2020 3:05 pm

my IPS defines my allocation targets in the context of stocks and bonds and other (speaking here of tax deferred space)... every three months I look and judge my need to rebalance based on the "5/25" criteria. If the target percentage for any of my holdings (stocks/bonds/other) is below 20% of total assets, I use the "25% relative" for deciding when to rebalance. If the target percentage for any of my holdings (stocks/bonds/other) is 20% or more I use "5% absolute" for deciding when to rebalance.

My targets are 65/30/5 (stock/bond/other)….so with "5/25" my tolerances are 60-70% stocks (5% absolute around my target), 25-35 % bonds (5% absolute around my target), 4-6% other (25% relative to my target, close enough for me)
Last edited by happysteward on Sun May 03, 2020 3:16 pm, edited 2 times in total.
"How much money is enough?", John Rockefeller responded, "...just a little bit more."

User avatar
iceport
Posts: 4655
Joined: Sat Apr 07, 2007 4:29 pm

Re: Share your Re-Balancing Strategy

Post by iceport » Sun May 03, 2020 3:11 pm

Kookaburra wrote:
Sun May 03, 2020 2:01 pm
However, the rigidity of a fixed schedule (e.g. once per year) might miss out on opportunities when the market is highly volatile as recently occurred with a 30% drop and rebound.
What are these "opportunities" of which you speak?

Are you assuming "rebalancing" will lead to higher returns if used as a way to time the market or as part of some kind of technical analysis scheme?

There seem to be some folks here that share your confidence. I doubt their ability to profit from their "rebalancing" efforts, and they've never provided any evidence whatsoever that it has helped or hurt their performance over the long term — which is the time frame that matters.

If the market drops twice as far as the recent lows, following a perfectly good rebalancing plan that had you sitting tight pending a further drop is likely to result in better performance than "rebalancing" early, shoveling more cash into equities only to have greater losses later.
"Discipline matters more than allocation.” ─William Bernstein

User avatar
ChowYunPhat
Posts: 272
Joined: Mon Jun 02, 2014 7:49 pm
Location: Texas

Re: Share your Re-Balancing Strategy

Post by ChowYunPhat » Sun May 03, 2020 3:18 pm

Kookaburra wrote:
Sun May 03, 2020 2:01 pm
I am reviewing my IPS and the section on re-balancing has always been a weak spot in terms of my understanding of best practices.
I appreciate this comment. My IPS describes allocations but doesn't go into great detail into the mechanics of rebalancing. At this time, I'm overweight cash by 5% and alternatives 5% (includes residential real estate) and underweight stocks by ~10%. This is somewhat explained by the recent volatility.

At this time, all new fund purchases are going into equity mutual funds so the daily DCA schedule we use shouold achieve the desired rebalanced allocation in a couple of months. However, we'll take opportunities to TLH as they arise and have already done so, although this was more stock to stock fund exchanges. We will likely continue to retain a higher cash surplus in case of a prolonged downturn or job loss.

Will be curious to see others replies. Thanks for posting.
A wise man and his money are friends forever...

longinvest
Posts: 4291
Joined: Sat Aug 11, 2012 8:44 am

Re: Share your Re-Balancing Strategy

Post by longinvest » Sun May 03, 2020 3:41 pm

I rebalance my portfolio daily using the cash flows of other investors. Actually, Vanguard fund managers do it for me.

I hold an automatically-rebalanced global balanced index One-Fund Portfolio. Such a portfolio is so simple to manage that my wife is able to manage her portfolio.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

RadAudit
Posts: 3857
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Share your Re-Balancing Strategy

Post by RadAudit » Sun May 03, 2020 3:43 pm

Kookaburra wrote:
Sun May 03, 2020 2:01 pm
I’m hoping to learn from the wise folks on this forum.
I've been excluded from answering due to your selection criteria; however, since you asked, I've been rebalancing iaw my IPS directives of a four fund portfolio, a 50 / 50 AA, and either a once a year rebalancing or whenever the AA exceeded a 5% rebalancing band. I believe I'd been following that approach for at least 12 years.

Then, in preparation for the inevitable, in discussing the topic with DW, I found out she didn't like rebalancing. Too complicated. So in January I tore up the portfolio inside the IRA (90%+ of all the our stocks and bonds) and replaced it with two LifeStrategy funds that average out to a 50 / 50 AA and left her with some simple instructions. And, so far it doesn't look as if the portfolio needs any intervention on my part. It may yet.

LifeStrategy funds appear to be rebalanced daily. And, their use has the advantage of easing the effort of maintaining a diversified portfolio and an AA that appears capable of meeting my needs and risk tolerance.

YMMV.
Last edited by RadAudit on Sun May 03, 2020 4:13 pm, edited 1 time in total.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

reln
Posts: 314
Joined: Fri Apr 19, 2019 4:01 pm

Re: Share your Re-Balancing Strategy

Post by reln » Sun May 03, 2020 4:00 pm

Kookaburra wrote:
Sun May 03, 2020 2:01 pm
Hello Bogleheads

I am reviewing my IPS and the section on re-balancing has always been a weak spot in terms of my understanding of best practices.

I realize re-balancing too often is detrimental (plus, I prefer less tinkering overall). However, the rigidity of a fixed schedule (e.g. once per year) might miss out on opportunities when the market is highly volatile as recently occurred with a 30% drop and rebound.

I’m hoping to learn from the wise folks on this forum. In that spirit, would folks mind sharing their written or unwritten re-balancing strategies? I’m focused on major asset classes (stocks vs bonds). It’s all fair game: fixed schedule, 5/25 rule, fixed frequency PLUS deviation, opportunistic when the market drops by X% over Y days, etc.

Thank you
https://investor.vanguard.com/investing ... /rebalance

L82GAME
Posts: 241
Joined: Sat Dec 07, 2019 9:29 am

Re: Share your Re-Balancing Strategy

Post by L82GAME » Sun May 03, 2020 4:08 pm

Kookaburra wrote:
Sun May 03, 2020 2:01 pm
Hello Bogleheads

I am reviewing my IPS and the section on re-balancing has always been a weak spot in terms of my understanding of best practices.

I realize re-balancing too often is detrimental (plus, I prefer less tinkering overall). However, the rigidity of a fixed schedule (e.g. once per year) might miss out on opportunities when the market is highly volatile as recently occurred with a 30% drop and rebound.

I’m hoping to learn from the wise folks on this forum. In that spirit, would folks mind sharing their written or unwritten re-balancing strategies? I’m focused on major asset classes (stocks vs bonds). It’s all fair game: fixed schedule, 5/25 rule, fixed frequency PLUS deviation, opportunistic when the market drops by X% over Y days, etc.

Thank you
I’ve struggled with this since March, as well. As a result, we’ve modified our IPS to allow for more flexibility during volatile bear markets using “Daryanani bands”, and during bull markets by focusing on not breaching our upper bands. Otherwise, it’d be a once per year process. I’m also buying stocks via bi-weekly payroll deductions and have therefore taken these transactions into account recently.

RNJ
Posts: 829
Joined: Mon Apr 08, 2013 9:06 am

Re: Share your Re-Balancing Strategy

Post by RNJ » Sun May 03, 2020 4:14 pm

Rebalance with inflows to lagging funds.

No longer rebalancing from bonds to stocks (moving towards retirement, so reducing risk).

Will use appreciated securities to fund charitable giving and/or to rebalance into bonds when passing 5% threshold

User avatar
Nate79
Posts: 6039
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Share your Re-Balancing Strategy

Post by Nate79 » Sun May 03, 2020 4:28 pm

Every six months only in tax advantage accounts.

User avatar
anon_investor
Posts: 2323
Joined: Mon Jun 03, 2019 1:43 pm

Re: Share your Re-Balancing Strategy

Post by anon_investor » Sun May 03, 2020 4:33 pm

I will rebalance if my target AA is more than 5% off (usually in my 401k tax free). Annually if I get a bonus, I may rebalance with any of those funds I choose to invest, but I usually only do that if I am more than 5% off my AA, which happened this year when my bonus hit mid March.

Topic Author
Kookaburra
Posts: 168
Joined: Thu Apr 02, 2020 11:14 pm

Re: Share your Re-Balancing Strategy

Post by Kookaburra » Sun May 03, 2020 9:55 pm

L82GAME wrote:
Sun May 03, 2020 4:08 pm
I’ve struggled with this since March, as well. As a result, we’ve modified our IPS to allow for more flexibility during volatile bear markets using “Daryanani bands”, and during bull markets by focusing on not breaching our upper bands. Otherwise, it’d be a once per year process. I’m also buying stocks via bi-weekly payroll deductions and have therefore taken these transactions into account recently.
What is a “Daryanani band”?

User avatar
tooluser
Posts: 617
Joined: Sat Oct 01, 2011 7:04 pm

Re: Share your Re-Balancing Strategy

Post by tooluser » Sun May 03, 2020 10:27 pm

I rebalance my overall portfolio to my target allocation every year around my half-birthday (not to the day). The rebalancing happens in the largest non-taxable account so there are no tax consequences and there is enough funds to make the difference..

For tax-deferred portions of the overall portfolio, all new funds are added towards the target allocation.

For tax-free portions, I cannot add any funds directly but will rebalance towards the target allocation after performing a Roth conversion from the Trad IRA.

For the taxable 10-speed portion of my portfolio, all new funds rebalance towards the 10-speed target allocation (80/20).

All the other odd ducks in my portfolio are just along for the ride (at 100/0), but factor into the overall asset allocation.

It's too complicated but is where I am. Only the overall rebalancing on my half-birthday actually gets me to my target.
So the simple answer is "once per year" regardless of market conditions then, or at any time in-between.

Other than when I changed my overall asset allocation from 97/3 to 80/20, I haven't had to make any massive moves. I have since been moving 2% a year towards 70/30 and just recently achieved that. The once yearly moves have been small. It actually required no rebalancing this year. The allocation seems to remain fairly well balanced as long as I add funds to the laggards.

sixtyforty
Posts: 463
Joined: Tue Nov 25, 2014 12:22 pm
Location: USA

Re: Share your Re-Balancing Strategy

Post by sixtyforty » Mon May 04, 2020 7:47 am

I own balanced funds, so I don't have to re-balance.
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci

livesoft
Posts: 72097
Joined: Thu Mar 01, 2007 8:00 pm

Re: Share your Re-Balancing Strategy

Post by livesoft » Mon May 04, 2020 7:50 am

I use many rebalancing methods. There is absolutely no reason to use a single method. I probably use almost all the methods described in this thread.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
firebirdparts
Posts: 1584
Joined: Thu Jun 13, 2019 4:21 pm

Re: Share your Re-Balancing Strategy

Post by firebirdparts » Mon May 04, 2020 9:47 am

I am also guilty of using more than one. My target is quarterly. It's very tempting to me to rebalance more than necessary. I am not sure really how much that affects the outcome, as well as how much is the effect of picking a random day-of-the-month (or some people here use a birthday annually). But I am convinced that in my lifetime, drawdowns and bull runs take a long time, so it seems like delay is your friend. I try not to mess with it.
A fool and your money are soon partners

L82GAME
Posts: 241
Joined: Sat Dec 07, 2019 9:29 am

Re: Share your Re-Balancing Strategy

Post by L82GAME » Mon May 04, 2020 5:30 pm

Kookaburra wrote:
Sun May 03, 2020 9:55 pm
L82GAME wrote:
Sun May 03, 2020 4:08 pm
I’ve struggled with this since March, as well. As a result, we’ve modified our IPS to allow for more flexibility during volatile bear markets using “Daryanani bands”, and during bull markets by focusing on not breaching our upper bands. Otherwise, it’d be a once per year process. I’m also buying stocks via bi-weekly payroll deductions and have therefore taken these transactions into account recently.
What is a “Daryanani band”?
See here: http://resource.fpanet.org/resource/09B ... yanani.pdf

retiredjg
Posts: 40871
Joined: Thu Jan 10, 2008 12:56 pm

Re: Share your Re-Balancing Strategy

Post by retiredjg » Mon May 04, 2020 5:35 pm

In "de-cumulation" phase. Mostly rebalance by taking money from the side that has too much. Don't worry much about any ratio other than stock to bond. The rest just takes care of itself most of the time.

I use 5% bands. When actual rebalancing is needed, I only get back into the band, not to the target.

markcoop
Posts: 1159
Joined: Fri Mar 02, 2007 8:36 am

Re: Share your Re-Balancing Strategy

Post by markcoop » Mon May 04, 2020 6:31 pm

I recently (because of the last few months) decided to go to a more dynamic AA model following some over-reblancing that got me out of whack.

46% stock - when I feel valuations are very high
50% stock - the majority of time
54% stock - when I feel valuations are very low

My rebalancing bands are an absolute 4%. For example, I currently am at 54% stock and will rebalance if I go below 50% or above 58%. So, part of it is firm (the exact allocations) but part of it is how I feel about the markets. Maybe not what others want (feelings to play a part), but I think it's tough to quantify high/low valuations and therefore I leave myself some room, but no too much in case I am wrong.
Mark

Normchad
Posts: 671
Joined: Thu Mar 03, 2011 7:20 am

Re: Share your Re-Balancing Strategy

Post by Normchad » Mon May 04, 2020 6:42 pm

For me personally, I do most of my financial housekeeping right around the first of the year.

That is when I update all my account balances to be correct, and look at my current AA. I also contemplate if that current AA is something I'm happy with. And if not, I make adjustments.

This is handy, because early January is also when I make my backdoor Roth contributions, and generally put a bunch of money in the market based on bonuses from work. So more often than not, it really just consists of me buying stuff that I feel "a little light" on.

I also relook at my 401K elections, and my monthly automatic investments, and make sure that won't sway my AA over the next 12 months.

User avatar
WoodSpinner
Posts: 1493
Joined: Mon Feb 27, 2017 1:15 pm

Re: Share your Re-Balancing Strategy

Post by WoodSpinner » Mon May 04, 2020 7:06 pm

OP,

Here is my approach....

1. Always re-balance at the beginning of the year to the target Asset Allocation.
2. Leverage opportunities to rebalance throughout the year through Funding Expenses, RMDs, QCDs by targeting specific Assets that are over-weighted.
3. Re-balance more frequently if a 5% Actual or 20% Relative threshold is exceeded. Periodically review the asset allocations to see if a rebalancing opportunity is present. The goal is to keep the Asset Allocation you are comfortable with while still allowing the market to move and change. Short-term and/or small deviations are simply not worth the effort and can be counter-productive.

Example 1 (20% Relative Re-balancing):
If fund XYZ has an allocation of 10% (20% of 10 is 2%) than you would re-balance, if:
a. If it went down to 8% (10% - 2%), you would buy more by selling other Assets
b. If it went up to 12% (10% + 2%), you would sell and by other assets.

Example 2 (5% Actual Re-balancing)
if fund XYZ has an allocation of 30% than you would re-balance, if:
a. If it went down to 25% (30% - 5%), you would buy more by selling other Assets
b. If it went up to 35% (30% + 5%), you would sell and by other assets.

WoodSpinner

rnitz
Posts: 276
Joined: Thu May 10, 2007 12:47 pm
Location: San Diego

Re: Share your Re-Balancing Strategy

Post by rnitz » Mon May 04, 2020 8:21 pm

I always thought of myself as a typical boglehead, but in this case I guess I'm wrong. Let me offer a countercultural view.

My re-balancing strategy: I don't.

I'm retired and started out 60/40 equities/bonds but with the long run up in stocks I'm now closer to 70/30. Note that my bond portfolio is just about where it was when I started, it's just that stocks have zoomed. I set my bond percentage not so much on a percentage basis, but on whether I could reasonably live if stocks went to zero forever (yes, with some cut backs, but a good, reasonable life). My spending hasn't changed, just the net worth and percentages - so why would I buy more bonds (they're still enough). I don't see why you need to tinker and market time (excuse me, "re-balance") if your bonds are set to a reasonable level for you. Anyway, one man's opinion.

OffGridder
Posts: 89
Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Re: Share your Re-Balancing Strategy

Post by OffGridder » Tue May 05, 2020 11:53 am

rnitz wrote:
Mon May 04, 2020 8:21 pm
I always thought of myself as a typical boglehead, but in this case I guess I'm wrong. Let me offer a countercultural view.

My re-balancing strategy: I don't.

I'm retired and started out 60/40 equities/bonds but with the long run up in stocks I'm now closer to 70/30. Note that my bond portfolio is just about where it was when I started, it's just that stocks have zoomed. I set my bond percentage not so much on a percentage basis, but on whether I could reasonably live if stocks went to zero forever (yes, with some cut backs, but a good, reasonable life). My spending hasn't changed, just the net worth and percentages - so why would I buy more bonds (they're still enough). I don't see why you need to tinker and market time (excuse me, "re-balance") if your bonds are set to a reasonable level for you. Anyway, one man's opinion.
.
Your approach is reasonable if it matches your personal risk tolerance. Are you withdrawing from your stocks to fund expenses?
"Goodness is the only investment that never fails." | H.D. Thoreau

User avatar
Hector
Posts: 1324
Joined: Fri Dec 24, 2010 2:21 pm
Contact:

Re: Share your Re-Balancing Strategy

Post by Hector » Tue May 05, 2020 2:06 pm

In the accumulation phase, sell bonds to buy stocks when stocks go below the desired allocation.
Use new contributions/dividend into bonds when bonds go below the desired allocation.

rnitz
Posts: 276
Joined: Thu May 10, 2007 12:47 pm
Location: San Diego

Re: Share your Re-Balancing Strategy

Post by rnitz » Tue May 05, 2020 8:35 pm

OffGridder wrote:
Tue May 05, 2020 11:53 am
rnitz wrote:
Mon May 04, 2020 8:21 pm
I always thought of myself as a typical boglehead, but in this case I guess I'm wrong. Let me offer a countercultural view.

My re-balancing strategy: I don't.

I'm retired and started out 60/40 equities/bonds but with the long run up in stocks I'm now closer to 70/30. Note that my bond portfolio is just about where it was when I started, it's just that stocks have zoomed. I set my bond percentage not so much on a percentage basis, but on whether I could reasonably live if stocks went to zero forever (yes, with some cut backs, but a good, reasonable life). My spending hasn't changed, just the net worth and percentages - so why would I buy more bonds (they're still enough). I don't see why you need to tinker and market time (excuse me, "re-balance") if your bonds are set to a reasonable level for you. Anyway, one man's opinion.
.
Your approach is reasonable if it matches your personal risk tolerance. Are you withdrawing from your stocks to fund expenses?
Yes, but I'm questioning that. The last two years I've sold some stocks (but small, as most of our spending is covered by dividends) but the capital gains taxes have vexed me. Selling bonds incurs no additional taxes, so I'm in a bit of a quandary as to whether it's better to drift back to initial asset allocation numbers or save real dollars by paying less taxes. I wish I'd written this into my IPS so I don't have to play with this (and risk hidden market timing impulses).

Post Reply