Rebalancing Tactics Question

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
FrugalInvestor
Posts: 4847
Joined: Fri Nov 07, 2008 12:20 am

Rebalancing Tactics Question

Post by FrugalInvestor » Thu Apr 15, 2010 10:30 pm

Do those of you who use a +/-5% rebalancing trigger apply that to each individual fund in your portfolio or do you wait until a component of your overall allocation percentages (stock/bond/cash) are outside of that band and then rebalance the individual funds in order to get it back in balance?
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

User avatar
White Coat Investor
Posts: 13362
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Post by White Coat Investor » Thu Apr 15, 2010 10:45 pm

individual fund.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

GammaPoint
Posts: 2590
Joined: Sun Aug 02, 2009 10:25 am
Location: Washington

Post by GammaPoint » Thu Apr 15, 2010 11:28 pm

Yep, individual fund or asset class (SV,LV, etc.).

User avatar
tetractys
Posts: 4596
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Post by tetractys » Thu Apr 15, 2010 11:38 pm

I use the 5/25 system. So I rebalance sensibly when an asset is out by 25% or when a major allocation is out by 5%. If I rebalanced every single asset when it was out only 5% it would drive me crazy, and it would be a non-productive waste of time. -- Tet
RESISTANCE IS FRUITFUL

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Post by Rodc » Thu Apr 15, 2010 11:51 pm

I use 5/20, not particular reason why 20% rather than 25%.

That is if any slice is off by 20% relative to target, for example if I want 7.5% emerging market and it gets larger than 9.0% (20% higher than 7.5%) I sell some, or if a major sector is out by 5% total, say I want 30% of my portfolio international and it drops to 24.9% I would buy some.

Almost any scheme is fine.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

User avatar
spam
Posts: 907
Joined: Tue Jun 10, 2008 9:47 am

Post by spam » Fri Apr 16, 2010 4:15 am


Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Post by Rodc » Fri Apr 16, 2010 9:07 am

Unfortunately this work assumes you know ahead of time what the market is going to do. But once you've cracked that nut I'm sure this will be important.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

btownguy
Posts: 443
Joined: Wed Mar 26, 2008 8:45 pm

Post by btownguy » Fri Apr 16, 2010 10:28 am

I use the 5/25 rule, although I do begin to get antsy when my major allocations start to get over 3% out of whack - especially my equities/fixed income AA. I treat my entire holdings as a single portfolio and have an Excel spreadsheet that I created that shows me my entire portfolio AA's.

When rebalancing, you can rarely get it back EXACTLY to your AA, but you can get it close. For example, if your rebalancing plan says that you need to sell $7000 emerging markets and you have $7500 VWO in your Traditional IRA, it really makes sense to go ahead and liquidate that entire position rather than hold on to just a couple of shares.

User avatar
FrugalInvestor
Posts: 4847
Joined: Fri Nov 07, 2008 12:20 am

Post by FrugalInvestor » Fri Apr 16, 2010 10:32 am

tetractys wrote:I use the 5/25 system. So I rebalance sensibly when an asset is out by 25% or when a major allocation is out by 5%. If I rebalanced every single asset when it was out only 5% it would drive me crazy, and it would be a non-productive waste of time. -- Tet
To clarify Tet, you apply the 5% to your stock/bond/cash allocation and the 25% to your individual holdings and it's an "either, or" trigger for you? Or is the 5% applied to some smaller slice similar to Rodc?

Thanks to Taylor and others here I have simplified to five slices...TBM, TIPS, TSM, TISM, CD's and Money Market. Now I'm working to formalize a rebalancing system that I can effectively communicate to my wife in the event something should happen to me. She is interested in and understands the importance of being more involved in the management of our investments but she does not have the level of interest that I do. I would like to develop some guidelines that will not seem overwhelming to her.

Edit: My overall allocation is (we are retired early and living off our our portfolio):

50 Bond/45 Stock/5 Cash

34% Total Stock Market
11% Total International Stock Market
20% Total Bond Market
20% Treasury Inflation Protected Securities
10% CD's
5% Money Market (operating cash)
Last edited by FrugalInvestor on Fri Apr 16, 2010 10:45 am, edited 4 times in total.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

btownguy
Posts: 443
Joined: Wed Mar 26, 2008 8:45 pm

Post by btownguy » Fri Apr 16, 2010 10:35 am

For my equties/fixed income AA, I use 5%. If the sum of all my equties is out of balance with the sum of all my fixed income by 5% or more, I rebalance.

For my equties, my target AA is as follows:
55% Domestic Large Cap
25% International - Developed Markets
10% International - Emerging Markets
10% Domestic Small Cap Value

If the Domestic Large Cap or the International - Developed Markets gets out of balance by 5% or more, I rebalance.

If the International - Emerging markets or Domestic Small Cap Value gets out of balance by 25% or more, I rebalance.

So, 5% for large holdings, 25% for small holdings.

User avatar
grap0013
Posts: 1884
Joined: Thu Mar 18, 2010 1:24 pm

Post by grap0013 » Fri Apr 16, 2010 10:43 am

FrugalInvestor wrote:
tetractys wrote:I use the 5/25 system. So I rebalance sensibly when an asset is out by 25% or when a major allocation is out by 5%. If I rebalanced every single asset when it was out only 5% it would drive me crazy, and it would be a non-productive waste of time. -- Tet
To clarify Tet, you apply the 5% to your stock/bond/cash allocation and the 25% to your individual holdings and it's an "either, or" trigger for you? Or is the 5% applied to some smaller slice similar to Rodc?

Thanks to Taylor and others here I have simplified to five slices...TBM, TIPS, TSM, TISM, CD's and Money Market. Now I'm working to formalize a rebalancing system that I can effectively communicate to my wife in the event something should happen to me. She is interested in and understands the importance of being more involved in the management of our investments but she does not have the level of interest that I do. I would like to develop some guidelines that will not seem overwhelming to her.
If you really want it simple for your wife just tell her to rebalance annually on some predefined date. Your portfolio doesn't look sliced and diced too much so I think this is the easiest solution and should not affect your returns very much good or bad.

User avatar
FrugalInvestor
Posts: 4847
Joined: Fri Nov 07, 2008 12:20 am

Post by FrugalInvestor » Fri Apr 16, 2010 10:49 am

grap0013 wrote:If you really want it simple for your wife just tell her to rebalance annually on some predefined date. Your portfolio doesn't look sliced and diced too much so I think this is the easiest solution and should not affect your returns very much good or bad.
Thank you grap0013, that may be the best answer. Currently we are harvesting the taxable portion of our portfolio where all the stocks reside so I am also attempting to keep taxable events to a minimum. I thought the percent rule may do a better job of this.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Post by Rodc » Fri Apr 16, 2010 11:05 am

Or is the 5% applied to some smaller slice similar to Rodc?
I do not apply the 5% to the slices, only the very broad class of Domestic stocks, International stocks, or Bonds.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

User avatar
mickeyd
Posts: 4598
Joined: Fri Feb 23, 2007 3:19 pm
Location: Deep in the Heart of South Texas

Post by mickeyd » Fri Apr 16, 2010 4:37 pm

Being either a lazy bum, or someone who likes to use the KISS method on as many things as possible, I look at my entire portfolio each December. If my AA is off by 5% at that time I go online and make the changes to get it back in sync. If my AA is close to 5%, but not quite there (maybe off by 4%), I give it another quarter or so to see if it's getting closer to 5%. If not, I leave it alone until next December.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

User avatar
tetractys
Posts: 4596
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Post by tetractys » Fri Apr 16, 2010 9:58 pm

FrugalInvestor wrote:To clarify Tet, you apply the 5% to your stock/bond/cash allocation and the 25% to your individual holdings and it's an "either, or" trigger for you? Or is the 5% applied to some smaller slice similar to Rodc?

Edit: My overall allocation is (we are retired early and living off our our portfolio):

50 Bond/45 Stock/5 Cash

34% Total Stock Market
11% Total International Stock Market
20% Total Bond Market
20% Treasury Inflation Protected Securities
10% CD's
5% Money Market (operating cash)
Hi FrugalInvestor,

I apply the 5% band to major allocations of Fixed (including cash), US stocks, and Intl stocks; and the 25% band to individual assets like Total Stock Market, Value, Small Cap Value, REITs, Microcaps, Total Intl, Intl Value, Intl Small Value, Emerging Markets, Inflation Protected, IT Bond, Money Market. The trigger is whichever comes first, the 5 or 25, and not an "either, or" situation. And I don't rebalance the whole portfolio, just between 2 or maybe 3 assets that are out the most.

The 5/25 rule is from Larry Swedroe's book about index investing.

Best regards, Tet
RESISTANCE IS FRUITFUL

walkinwood
Posts: 72
Joined: Wed Sep 05, 2007 10:57 am
Location: Denver, CO

Post by walkinwood » Sat Apr 17, 2010 4:14 pm

This article deals with ways to rebalance using bands

http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Post by Rodc » Sat Apr 17, 2010 4:26 pm

walkinwood wrote:This article deals with ways to rebalance using bands

http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf
Not too bad a paper. We have a number of threads on this paper that can be looked up.

I will only comment that the data period is far too short, despite the author's claims otherwise, and more importantly, it shows, once again, just how little difference these choices make.

Over this one short period using using bands of 10%-25% hardly made any difference, a small fraction of one percent which is surely noise.

This is actually good news: one more thing where all you need to do is pick one of the standard methods and forget about it.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Post Reply