Any rebalancing benifit in owning only VTWSX?

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kjm
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Any rebalancing benifit in owning only VTWSX?

Post by kjm »

Ok. let's say I want to construct a super simple, long-term, 100% equity portfolio. It looks like this:

100% VTWSX (all world equity)


Alternatively I could create a slightly less simple 100% equity portfolio that looks like this:

50% VTSMX (all US equity)
50% VFWIX (all world excluding US equity)


Assuming I rebalance annually, would the second portfolio lead to a larger rebalancing bonus than the first? My hunch is 'NO'. I assume there will be some underlying rebalancing going on within VTWSX equal in magnitude to what I'd be doing with portfolio #2.


What are your thoughts?


*I want to add that I understand that the largest rebalancing bonus comes from rebalancing between noncorrelated or negatively correlated asset classes (such as stocks and bonds). The focus here is just on rebalncing between equities.
YDNAL
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Re: Any rebalancing benifit in owning only VTWSX?

Post by YDNAL »

kjm wrote:Assuming I rebalance annually, would the second portfolio lead to a larger rebalancing bonus than the first? My hunch is 'NO'. I assume there will be some underlying rebalancing going on within VTWSX equal in magnitude to what I'd be doing with portfolio #2.

What are your thoughts?

*I want to add that I understand that the largest rebalancing bonus comes from rebalancing between noncorrelated or negatively correlated asset classes (such as stocks and bonds). The focus here is just on rebalncing between equities.
kjm,

Your hunch is likely correct. However, some things to consider:

1) Higher diversification of split funds with 5526 Holdings versus 2733 Holdings in Total World (VTWSX).

2) FTSE ex US (VFWIX) is missing small caps - also the case with VTWSX - so adding another fund seems almost a necessity.

3) Your 2-fund approach undercuts Foreign since global weights currently are running 41/59 Domestic/Foreign - almost 10% - and this approach will certainly have a different return*.

* maybe higher, maybe lower. :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Tramper Al
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Re: Any rebalancing benifit in owning only VTWSX?

Post by Tramper Al »

kjm wrote:Ok. let's say I want to construct a super simple, long-term, 100% equity portfolio. It looks like this:

100% VTWSX (all world equity)


Alternatively I could create a slightly less simple 100% equity portfolio that looks like this:

50% VTSMX (all US equity)
50% VFWIX (all world excluding US equity)


Assuming I rebalance annually, would the second portfolio lead to a larger rebalancing bonus than the first? My hunch is 'NO'. I assume there will be some underlying rebalancing going on within VTWSX equal in magnitude to what I'd be doing with portfolio #2.
Perhaps my understanding is faulty on this, but I believe any all-whatever index fund -- where whatever is the constantly changing cap-weighted mix -- does not engage in what we commonly think of as rebalancing (back to some arbitrary %). There were even some people who used to point to the magical self-balancing properties of TSM, for example. Silly, right? Financials grow to be 50% of TSM, so the automatic rebalancing makes the TSM fund 50% financials. Hang on a minute, it already is.

Your 50%/50% proposal is different, of course. There is an arbitrary mix that periodic rebalancing gets you back to. The 50% that grows larger is sold at the end of some period, just to buy more of the 50% that had not grown as much. Quite different. May not necessarily provide a "bonus", of course. If foreign outperforms US for 10 consecutive years, you would have done far better "letting it ride". But if the two assets do have similar long term return, yet trade off gains and losses along the way, you really ought to be better off in terms of volatility and even a modest bonus in returns if you rebalance. Ignoring any transaction costs or taxes, of course.

Probably US stocks vs. developed foreign stocks isn't the best example for some rebalancing bonus to be expected, as they have been and will likely continue to be pretty highly (positively) correlated. But if there is (nearly) zero cost to splitting, I almost always do. But I don't really value simplistic. Or simplistic-ity.
Last edited by Tramper Al on Tue Sep 22, 2009 11:04 am, edited 1 time in total.
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drjdpowell
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Re: Any rebalancing benifit in owning only VTWSX?

Post by drjdpowell »

kjm wrote:Assuming I rebalance annually, would the second portfolio lead to a larger rebalancing bonus than the first? My hunch is 'NO'. I assume there will be some underlying rebalancing going on within VTWSX equal in magnitude to what I'd be doing with portfolio #2.
I don't believe in the "rebalancing bonus", but, I think the world-equity fund is market-cap weighted, rather than holding fixed percentages of US and non-US. Thus, it does not "rebalance" to fixed percentages as in your second portfolio.

-- James
sia
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Post by sia »

If you're trying to get extra return through re-balancing - also consider the very real tax implications. Last year the total world was 100% qdi vs the ex-us was at about 70%. That's a pretty big difference and as an annual cost, it will compound and eat away at your returns.

Also the bigger risk with S&D as you suggest is the assumption that the ratio of us:ex-US is actually fixed. This is just not true. The US share has been declining for years from up to 70% just a few decades ago to now down to 40%. If you at GDPs, its logical to argue it will continue to trend down towards almost 20%. I really like the simplicity of Total World just for this reason - I don't have to guess and can remain agnostic - no reason to overweight GM vs Toyota just bc its headquartered in US.
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alvinsch
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Re: Any rebalancing benifit in owning only VTWSX?

Post by alvinsch »

kjm wrote:Ok. let's say I want to construct a super simple, long-term, 100% equity portfolio. It looks like this:

100% VTWSX (all world equity)


Alternatively I could create a slightly less simple 100% equity portfolio that looks like this:

50% VTSMX (all US equity)
50% VFWIX (all world excluding US equity)


Assuming I rebalance annually, would the second portfolio lead to a larger rebalancing bonus than the first? My hunch is 'NO'. I assume there will be some underlying rebalancing going on within VTWSX equal in magnitude to what I'd be doing with portfolio #2.


What are your thoughts?
Here's my thoughts.

Let's assume that at the start of your experiment that VTWSX represents a 50/50 allocation between US and foreign equity.

Case 1: If at the end of your experiment, VTWSX still represents a 50/50 allocation between US and foreign equity. I would expect the 50/50 VTSMX/VFWIX combination to outperform the single fund because there would likely have been some rebalancing occurring between them which would marginally have increased returns if the ratio ends up at the same point (mean reversion argument).

Case 2: If either foreign or US greatly outperforms such that the mix of foreign to US ends up greatly different than the starting point, then it is likely that the single fund would outperform because the two fund solution would be selling the outperforming asset while buying the underperforming asset during this period (there's no reason US/foreign should mean revert argument).

- Al
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tetractys
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Re: Any rebalancing benifit in owning only VTWSX?

Post by tetractys »

kjm wrote:Assuming I rebalance annually, would the second portfolio lead to a larger rebalancing bonus than the first? My hunch is 'NO'. I assume there will be some underlying rebalancing going on within VTWSX equal in magnitude to what I'd be doing with portfolio #2.
kjm,

For the possibility of a rebalancing bonus at all, there needs to be at least two negatively or low correlating assets, or funds, for you to rebalance against. A single index fund more or less stays in balance continually, so there won't even be any "underlying" bonus there.

So the answer is that only portfolio #2 allows the possibility of any rebalancing bonus at all.

Best regards, Tet
RESISTANCE IS FRUITFUL
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