How often do you rebalance?

[rholt]

For years I have had a well defined investment distribution target which amounts to

35% Bond
25% International Equity
35% Domestic Equity
5% Cash or Cash Equivalents

That has worked well for me and I am happy with it. But - my investing plan has always been a little vague when it comes to when and how often I should rebalance. In the past - I have tended to rebalance pretty quickly - think weekly. It feels like this is something I should put a little thought into and formalize.

Would love to hear people's thoughts.

[steadyosmosis]

My activity frequency increases as market volatility increases.
Some people would call my activity rebalancing.

[livesoft]

We are withdrawing from our portfolio in retirement to pay expenses. We sell equities in our taxable account to create the cash. We will rebuy the equities by exchanging in a tax-deferred account from a bond fund to the equity fund. We only buy enough to get back to our desired asset allocation.

We do not reinvest dividends paid by our funds in our taxable account, but instead spend them. That is a kind of "rebalancing" in that the share NAV drops by the amount of the dividend paid per share. That alone knocks off about 2% of the value of the equities in the taxable account annually.

In addition to the above, we rebalance on or shortly after an RBD happens whether that RBD happens in equities or bonds.

[bardenay]

For a long time my written Financial Policy Statement said that I would rebalance when there was a variance of more than 5%. It wasn't until there was a big swing in the market that I realized that there needed to be a time component to my rebalancing plan because in theory, I could end up rebalancing multiple times in one day with my current plan.

Based on previous conversations on the forum and this article from Vanguard I updated my rebalancing plan to this:
https://corporate.vanguard.com/content/ ... ancing.pdf

"Rebalancing

Target Asset Allocation is maintained by monthly contributions and a once yearly re-allocation. Re-allocation is done in the 3rd week of March or the 3rd week of September and only if there is a variance of 5% or more."

In practice, I have only had to a few times.

[enad]

Look into Larry Swedroe's "5/25 rule" which suggests rebalancing a portfolio only when an asset class deviates from its target allocation by either an absolute 5% (for allocations of 20% or more) or a relative 25% (for allocations less than 20%), whichever is less. This can be implemented in a spreadsheet making it purely mechanical and preventing frequent buying/selling.

[AlwaysLearningMore]

That's a good question. Among our tax-advantaged accounts are index type balanced funds, as well as Wellington. I'm not sure how often Wellington rebalances. I assume the balanced index funds rebalance daily or every other day, depending on inflow and outflow. I could be wrong about the rebalancing frequency.
We do not rebalance our taxable accounts equity funds or municipal funds.

[ccompounder]

That's a good question. Among our tax-advantaged accounts are index type balanced funds, as well as Wellington. I'm not sure how often Wellington rebalances. I assume the balanced index funds rebalance daily or every other day, depending on inflow and outflow. I could be wrong about the rebalancing frequency.
We do not rebalance our taxable accounts equity funds or municipal funds.

I have seen this a few times, but in practice, how are you notified about it? It's not like you will get a notification when this happens. So you have to either rely on market news ("Doom"), or you have to constantly recompute your current allocation and then see if you have crossed the threshold or not.

[rkhusky]

That's a good question. Among our tax-advantaged accounts are index type balanced funds, as well as Wellington. I'm not sure how often Wellington rebalances. I assume the balanced index funds rebalance daily or every other day, depending on inflow and outflow. I could be wrong about the rebalancing frequency.
We do not rebalance our taxable accounts equity funds or municipal funds.

I have seen this a few times, but in practice, how are you notified about it? It's not like you will get a notification when this happens. So you have to either rely on market news ("Doom"), or you have to constantly recompute your current allocation and then see if you have crossed the threshold or not.

You get a feeling for it. If you have the normal 5% bands, the market has to move a lot to trigger a rebalance. You usually hear about the big drops in the news. I have narrower bands and I don’t even rebalance much.

[AlwaysLearningMore]

That's a good question. Among our tax-advantaged accounts are index type balanced funds, as well as Wellington. I'm not sure how often Wellington rebalances. I assume the balanced index funds rebalance daily or every other day, depending on inflow and outflow. I could be wrong about the rebalancing frequency.
We do not rebalance our taxable accounts equity funds or municipal funds.

I have seen this a few times, but in practice, how are you notified about it? It's not like you will get a notification when this happens. So you have to either rely on market news ("Doom"), or you have to constantly recompute your current allocation and then see if you have crossed the threshold or not.

It's my understanding that the index type of balanced funds rebalance based on the day's market activity, of course taking into account fund inflows and outflows. You are correct, there is no "notification" about when it's done, but since they are committed to a certain asset allocation, It's likely they have to rebalance frequently enough to come close to that allocation.

In terms of Wellington, I have no idea how often they rebalance. They don't send out a notification when it's done, to the best of my knowledge. The managers may have more leeway than an indexed type balanced fund.

For us it's nice that rebalancing activity has been "outsourced" to Vanguard since I don't think we would be doing nearly as good a job.

[arcticpineapplecorp.]

+/-5% rebalancing bands, by Harry Sit

of course you want to be careful about taxable events (you didn't say whether you're rebalancing in taxable or retirement accounts).

But if you want to avoid a taxable event you could adjust your retirement account allocation to bring the overall AA back in line depending on what's happening in taxable and then there would be no taxable event. So if stocks fall (as they have) in taxable, you'd increase taxable (buying stocks in taxable) or in retirement account (selling bonds to buy stocks in retirement acccount). If stocks rise, instead of selling stocks in taxable (and creating taxable events) you could reduce stocks in retirement accounts instead (sell stocks to buy bonds there). Make sense?

[rholt]

OP here -

Thanks for the feedback - I will look into this 5% rule - sounds pretty sensible.

Luckily - I am still in accumulation phase - so - to some degree - I can rebalance with new money. I agree with the prior poster that rebalancing that requires taxable events is a whole different kettle of fish.

[JazzTime]

I've never rebalanced. No need. Let the winners run. Of course, over my entire investing path I've always been invested at least 90% or more in U.S. equities. It's worked out quite well. You just need courage to stay the course during down markets, which I view as buying opportunities.

As to international, I think that is just "deworsification." I've never seen international outpace the US market over any reasonable time period. But that's me. Most BHers probably disagree.

[Target2019]

OP here -

Thanks for the feedback - I will look into this 5% rule - sounds pretty sensible.

Luckily - I am still in accumulation phase - so - to some degree - I can rebalance with new money. I agree with the prior poster that rebalancing that requires taxable events is a whole different kettle of fish.

I always found re-balancing with new contributions while accumulating was the way to go. We did not use bands much during that time. I looked ahead to see how a year's contributions affected equity percentage, and set weekly amounts to a few funds to maintain our overall asset allocation.

The challenging time is when stocks crater in a recession. So you'll have to make other decision(s) if you really want to maintain tight allocations.

In a very turbulent market, well, you'll see...

[Motostash]

If contributions won't fix it within a month, I adhere to +/-3% bands because I'm a neurotic nitwit.

[Garco]

I can't recall when I last rebalanced my accounts. I have made some changes in investment holdings, and I've moved some money between stocks and fixed income holdings. But I didn't have "rebalance" in my head when I did so. I used to be follow a rule many years ago. Now I mainly ride the waves and move money between specific holdings but I'm not following a static principle when I do so.

[jec1ny]

As rarely as possible.

[gunny]

For me this is as much an art as a science. No set timeframe. I tend to trust my instincts. I've always been very aggressive, but as I am (very) near retirement, I've shifted to a more balanced approach, going more heavily in cash than bonds. I may shift that again in the semi-near future as I suspect things like money markets will suffer declining returns.

[helloeveryone]

For years I have had a well defined investment distribution target which amounts to

35% Bond
25% International Equity
35% Domestic Equity
5% Cash or Cash Equivalents

That has worked well for me and I am happy with it. But - my investing plan has always been a little vague when it comes to when and how often I should rebalance. In the past - I have tended to rebalance pretty quickly - think weekly. It feels like this is something I should put a little thought into and formalize.

Would love to hear people's thoughts.

Roughly once or twice a year. Usually when it gets out of balance by 5-10%. Two fund portfolio. 80:20.

All my monthly contributions out of paycheck have been Fidelity 500 Index Fund since I started working. Then at some point when I went 80:20 - I rebalanced to the 20% vanguard total bond.

I don’t use monthly contributions to “balance” things out. I just dump all new contributions to fidelity 500 and then when it’s out of balance I rebalance. Keeping it simple that way. Prob not the perfect method but it helps minimizing messing around with things