Vanguard Target Retirement 2065
Vanguard Target Retirement 2065
If any of you all are young (like me) or have children, Vanguard launched the Target Retirement 2065. Just moved some of my money over there for simplicity.
Cheers!
Cheers!
- willthrill81
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Re: Vanguard Target Retirement 2065
Along with Paul Merriman, I have to say that I really have no idea why Vanguard has 10% of these funds in bonds when the target date is multiple decades into the future. The perceived volatility will be nearly the same as that of a 100/0 fund, and that 10% in bonds reduces the expected return by .4-.5% every year, which is a big crutch over a nearly 40 year period. Twenty years and in makes sense to me, but nearly 40?
The Sensible Steward
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Re: Vanguard Target Retirement 2065
For those who do not want any bonds, the solution is simple - hold stock funds.willthrill81 wrote:Along with Paul Merriman, I have to say that I really have no idea why Vanguard has 10% of these funds in bonds when the target date is multiple decades into the future. The perceived volatility will be nearly the same as that of a 100/0 fund, and that 10% in bonds reduces the expected return by .4-.5% every year, which is a big crutch over a nearly 40 year period. Twenty years and in makes sense to me, but nearly 40?
I believe Benjamin Graham suggested asset allocations of 25/75 in either direction.
Last edited by DSInvestor on Sun Jul 16, 2017 2:06 pm, edited 1 time in total.
- willthrill81
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Re: Vanguard Target Retirement 2065
I agree that the solution is simple, but it still does not address why Vanguard has 10% of a 2065 fund in bonds.DSInvestor wrote:For those who do not want any bonds, the solution is simple - hold stock funds.willthrill81 wrote:Along with Paul Merriman, I have to say that I really have no idea why Vanguard has 10% of these funds in bonds when the target date is multiple decades into the future. The perceived volatility will be nearly the same as that of a 100/0 fund, and that 10% in bonds reduces the expected return by .4-.5% every year, which is a big crutch over a nearly 40 year period. Twenty years and in makes sense to me, but nearly 40?
The Sensible Steward
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Re: Vanguard Target Retirement 2065
Vanguard's approach to target date funds:
https://advisors.vanguard.com/VGApp/iip ... EWIR062915
It's not just Vanguard's TR funds that are like this.
Fidelity's Freedom Index 2060 has 10% bonds.
https://fundresearch.fidelity.com/mutua ... /315793695
TRP's TR60 fund has 14% bonds/cash:
http://www3.troweprice.com/fb2/fbkweb/c ... cker=TRTFX
TSP Lifecycle 2050 has 17% bonds:
https://www.tsp.gov/InvestmentFunds/Fun ... L2050.html
Schwab TR 2060 has around 5% bonds:
http://www.schwab.com/public/schwab/inv ... ol%3DSWYNX
https://advisors.vanguard.com/VGApp/iip ... EWIR062915
It's not just Vanguard's TR funds that are like this.
Fidelity's Freedom Index 2060 has 10% bonds.
https://fundresearch.fidelity.com/mutua ... /315793695
TRP's TR60 fund has 14% bonds/cash:
http://www3.troweprice.com/fb2/fbkweb/c ... cker=TRTFX
TSP Lifecycle 2050 has 17% bonds:
https://www.tsp.gov/InvestmentFunds/Fun ... L2050.html
Schwab TR 2060 has around 5% bonds:
http://www.schwab.com/public/schwab/inv ... ol%3DSWYNX
- willthrill81
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Re: Vanguard Target Retirement 2065
From that paper,DSInvestor wrote:Vanguard's approach to target date funds:
https://advisors.vanguard.com/VGApp/iip ... EWIR062915
Based on that logic, one could easily argue, though not definitively, that a 100% equity allocation for young investors makes sense.As described earlier, the human capital theory supports a larger commitment to equities for young individuals, declining to a more modest
allocation as the investor approaches retirement and eventually leaves the workforce. Vanguard TDFs maintain a significant level of equity exposure (90%) to age 40 because one’s human capital remains so dominant over the small balances in financial capital during the early stages of asset accumulation.
Again, why?DSInvestor wrote:It's not just Vanguard's TR funds that are like this.
Fidelity's Freedom Index 2060 has 10% bonds.
https://fundresearch.fidelity.com/mutua ... /315793695
TRP's TR60 fund has 14% bonds/cash:
http://www3.troweprice.com/fb2/fbkweb/c ... cker=TRTFX
TSP Lifecycle 2050 has 17% bonds:
https://www.tsp.gov/InvestmentFunds/Fun ... L2050.html
Schwab TR 2060 has around 5% bonds:
http://www.schwab.com/public/schwab/inv ... ol%3DSWYNX
The Sensible Steward
- ClevrChico
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Re: Vanguard Target Retirement 2065
This makes me feel old!
Re: Vanguard Target Retirement 2065
The benefit of re-balancing will reduce this differential. For example, assuming a constant 2% growth from bonds, if stocks grew 6% every year, the "drag" from the bonds would indeed be 0.4% (90% * 6% + 10% * 2% = 5.6%). Over eight years a $10,000 investment would grow to $15,464 (10000 * 1.056 ^ 8). However, instead of stocks growing 6% every year lets assume the following:willthrill81 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3451758#p3451758]this post[/url] wrote:... I really have no idea why Vanguard has 10% of these funds in bonds when the target date is multiple decades into the future. ... that 10% in bonds reduces the expected return by .4-.5% every year, ...
- Stocks repeatedly grow 20% one year and then fall 6.3667% the next year. This is equivalent to a 6% compound growth rate.
Code: Select all
(1 + 20%) * (1 - 6.3667%) = 1.1236 = 1.06 * 1.06
- At the end of each year stocks and bonds are re-balanced to 90% : 10%.
Code: Select all
Stock up 20.0000% 42.2105%
Stock down -6.3667% -20.9904%
Year Stocks Bonds Total Stocks Bonds Total
0 9,000 1,000 10,000 9,000 1,000 10,000
1 10,638 1,182 11,820 12,437 1,382 13,819
2 10,050 1,117 11,166 10,112 1,124 11,236
3 11,879 1,320 13,199 13,974 1,553 15,527
4 11,222 1,247 12,469 11,362 1,262 12,625
5 13,264 1,474 14,738 15,701 1,745 17,446
6 12,531 1,392 13,923 12,767 1,419 14,185
7 14,811 1,646 16,457 17,642 1,960 19,602
8 13,992 1,555 15,547 14,345 1,594 15,938
Annual growth 5.671% 6.000%
- willthrill81
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Re: Vanguard Target Retirement 2065
You are suggesting that there is a rebalancing bonus or at least that a portfolio with some amount of bonds will, over the long-term, perform just as well as a 100% stock portfolio. History has shown that that's not the case. Rebalancing maintains a desired level of risk but has not historically improved returns.#Cruncher wrote:The benefit of re-balancing will reduce this differential. For example, assuming a constant 2% growth from bonds, if stocks grew 6% every year, the "drag" from the bonds would indeed be 0.4% (90% * 6% + 10% * 2% = 5.6%). Over eight years a $10,000 investment would grow to $15,464 (10000 * 1.056 ^ 8). However, instead of stocks growing 6% every year lets assume the following:willthrill81 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3451758#p3451758]this post[/url] wrote:... I really have no idea why Vanguard has 10% of these funds in bonds when the target date is multiple decades into the future. ... that 10% in bonds reduces the expected return by .4-.5% every year, ...
Instead of $15,464, with re-balancing the investment would grow to $15,547, a growth rate of 5.671%.
- Stocks repeatedly grow 20% one year and then fall 6.3667% the next year. This is equivalent to a 6% compound growth rate.
Code: Select all
(1 + 20%) * (1 - 6.3667%) = 1.1236 = 1.06 * 1.06
- At the end of each year stocks and bonds are re-balanced to 90% : 10%.
And if stocks alternated between growing 42.2105% and falling 20.9904% (still averaging 6%), with re balancing the investment would grow to $15,938, a growth rate of 6%. This is the same as a 100% stock portfolio growing 6% per year.Code: Select all
Stock up 20.0000% 42.2105% Stock down -6.3667% -20.9904% Year Stocks Bonds Total Stocks Bonds Total 0 9,000 1,000 10,000 9,000 1,000 10,000 1 10,638 1,182 11,820 12,437 1,382 13,819 2 10,050 1,117 11,166 10,112 1,124 11,236 3 11,879 1,320 13,199 13,974 1,553 15,527 4 11,222 1,247 12,469 11,362 1,262 12,625 5 13,264 1,474 14,738 15,701 1,745 17,446 6 12,531 1,392 13,923 12,767 1,419 14,185 7 14,811 1,646 16,457 17,642 1,960 19,602 8 13,992 1,555 15,547 14,345 1,594 15,938 Annual growth 5.671% 6.000%
According to Vanguard, every 10% increase in a portfolio's allocation to bonds has reduced the CAGR by .3% to .5%, and that's with annual rebalancing.
The Sensible Steward
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Re: Vanguard Target Retirement 2065
The main point of the Target Dated Fund is someone that knows nothing about investing or will never want to know has a plan that is done for them. So, with all the mistakes they can make in 40-50 yrs of investing .5% (maybe) is a small price to pay. They could do a lot more damage playing with the investments.
This is why the market has returned a lot more than investors make.
Anyway it is the best way to start until someone wants to learn (maybe).
This is why the market has returned a lot more than investors make.
Anyway it is the best way to start until someone wants to learn (maybe).
- willthrill81
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Re: Vanguard Target Retirement 2065
Certainly that's true, but it's beside the point. Including 10% of the fund in bonds isn't doing the investors any favors. It isn't enough to noticeably reduce the volatility, and over time it will likely cost investors a lot of money.indexonlyplease wrote:The main point of the Target Dated Fund is someone that knows nothing about investing or will never want to know has a plan that is done for them. So, with all the mistakes they can make in 40-50 yrs of investing .5% (maybe) is a small price to pay. They could do a lot more damage playing with the investments.
That's an ongoing myth that's simply false. DALBAR's studies on the issue are completely bogus. Here's an article describing why. Most investors keep pace with the market just fine.indexonlyplease wrote:This is why the market has returned a lot more than investors make.
For now, that's probably true.indexonlyplease wrote:Anyway it is the best way to start until someone wants to learn (maybe).
The Sensible Steward
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Re: Vanguard Target Retirement 2065
Thanks for that article. I will read it.willthrill81 wrote:Certainly that's true, but it's beside the point. Including 10% of the fund in bonds isn't doing the investors any favors. It isn't enough to noticeably reduce the volatility, and over time it will likely cost investors a lot of money.indexonlyplease wrote:The main point of the Target Dated Fund is someone that knows nothing about investing or will never want to know has a plan that is done for them. So, with all the mistakes they can make in 40-50 yrs of investing .5% (maybe) is a small price to pay. They could do a lot more damage playing with the investments.
That's an ongoing myth that's simply false. DALBAR's studies on the issue are completely bogus. Here's an article describing why. Most investors keep pace with the market just fine.indexonlyplease wrote:This is why the market has returned a lot more than investors make.
For now, that's probably true.indexonlyplease wrote:Anyway it is the best way to start until someone wants to learn (maybe).
Re: Vanguard Target Retirement 2065
I did suggest [1] that there is a re-balancing bonus. This was a mistake. I should have said "may be" because there can certainly be scenarios where re-balancing does not improve returns. However, I did not suggest [2] that a portfolio with bonds will, over the long term, perform as well as a 100% stock portfolio.willthrill81 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3451872#p3451872]this post[/url] wrote:You are suggesting [1] that there is a rebalancing bonus or at least [2] that a portfolio with some amount of bonds will, over the long-term, perform just as well as a 100% stock portfolio.
I'd like to see some evidence for this. It's quite possible I'm wrong in thinking that re-balancing usually improves returns. Unfortunately, willthrill81, the Vanguard report you cite doesn't address this question. It simply shows that over the period 1926-2015 portfolios performed better the higher the stock allocation. But it doesn't provide any information about the effect of re-balancing. [*]willthrill81 in same post wrote:Rebalancing ... has not historically improved returns. According to Vanguard, every 10% increase in a portfolio's allocation to bonds has reduced the CAGR by .3% to .5%, and that's with annual rebalancing.
What I'd like to see is a report like the following one that I cobbled together -- except more comprehensive. It's based on the 2002-2016 returns for Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) and Vanguard Total Bond Market Index Fund Investor Shares (VBMFX).
Code: Select all
------ Rebalancing ------
VTSMX VBMFX Without With Diff
100% 0% 7.212% n/a
90% 10% 6.968% 7.125% 0.157%
80% 20% 6.716% 6.986% 0.270%
70% 30% 6.455% 6.798% 0.343%
60% 40% 6.185% 6.565% 0.380%
50% 50% 5.905% 6.289% 0.385%
40% 60% 5.614% 5.972% 0.359%
30% 70% 5.311% 5.616% 0.305%
20% 80% 4.996% 5.222% 0.226%
10% 90% 4.667% 4.790% 0.123%
0% 100% 4.323% n/a
Code: Select all
% Change Without Rebalancing With Rebalancing
--------------- --------------------- ---------------------
Year VTSMX VBMFX VTSMX VBMFX Total VTSMX VBMFX Total
Code: Select all
9,000 1,000 10,000 9,000 1,000 10,000
2002 (20.96%) 8.26% 7,114 1,083 8,196 7,377 820 8,196
2003 31.35% 3.97% 9,344 1,126 10,469 9,487 1,054 10,541
2004 12.52% 4.24% 10,514 1,173 11,687 10,596 1,177 11,774
2005 5.98% 2.40% 11,142 1,201 12,344 11,192 1,244 12,436
2006 15.51% 4.27% 12,870 1,253 14,123 12,802 1,422 14,225
2007 5.49% 6.92% 13,577 1,339 14,916 13,523 1,503 15,026
2008 (37.04%) 5.05% 8,548 1,407 9,955 9,084 1,009 10,093
2009 28.70% 5.93% 11,001 1,491 12,492 11,484 1,276 12,760
2010 17.09% 6.42% 12,882 1,586 14,468 13,324 1,480 14,804
2011 0.96% 7.56% 13,005 1,706 14,711 13,540 1,504 15,044
2012 16.25% 4.05% 15,119 1,775 16,894 15,575 1,731 17,305
2013 33.35% (2.26%) 20,161 1,735 21,896 20,214 2,246 22,460
2014 12.43% 5.76% 22,667 1,835 24,502 22,592 2,510 25,102
2015 0.29% 0.30% 22,732 1,841 24,573 22,658 2,518 25,175
2016 12.53% 2.50% 25,581 1,887 27,467 25,269 2,808 28,077
------ ------ ------ ------
Return 7.212% 4.323% 6.968% 7.125%
* Even though the Vanguard report doesn't address the issue of whether or not re-balancing helps returns, its results are quite interesting in their own right:
Code: Select all
Change
Stocks Bonds Growth Per 10%
------ ----- ------ -------
0 100 5.4%
20 80 6.7% 0.65%
30 70 7.2% 0.50%
40 60 7.8% 0.60%
50 50 8.3% 0.50%
60 40 8.7% 0.40%
70 30 9.1% 0.40%
80 20 9.5% 0.40%
100 0 10.1% 0.30%
It's too bad Vanguard didn't include the 10:90 and 90:10 portfolios to better show this effect near the extremes of allocation. It's especially unfortunate Vanguard didn't include the stock:bond 90:10 portfolio since that's the one for Vanguard Target Retirement 2065 Fund (VLXVX) which willthrill81 is criticizing.
- willthrill81
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Re: Vanguard Target Retirement 2065
When you said this,#Cruncher wrote:I did suggest [1] that there is a re-balancing bonus. This was a mistake. I should have said "may be" because there can certainly be scenarios where re-balancing does not improve returns. However, I did not suggest [2] that a portfolio with bonds will, over the long term, perform as well as a 100% stock portfolio.willthrill81 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3451872#p3451872]this post[/url] wrote:You are suggesting [1] that there is a rebalancing bonus or at least [2] that a portfolio with some amount of bonds will, over the long-term, perform just as well as a 100% stock portfolio.
I thought that's what you were directly implying.#Cruncher wrote:And if stocks alternated between growing 42.2105% and falling 20.9904% (still averaging 6%), with re balancing the investment would grow to $15,938, a growth rate of 6%. This is the same as a 100% stock portfolio growing 6% per year.
Fair enough. Just go to Portfolio Visualizer and compare different allocations between something like TSM and ITT (longer data than TBM but similar performance) with and without rebalancing. At least from 1972 to now, the differences I've seen range from zero to under 10 bps. But with other asset classes, there has actually been a big cost to rebalancing. For instance, with a single $10,000 investment, a portfolio comprised of 50% SCV and 50% ITT rebalanced annually from 1972 to now had a CAGR of 11.26% but 12.70% if no rebalancing was used. If $10,000 was added to the portfolio annually, then the final portfolio balance would be $21.9 million with rebalancing $37.1 million with no rebalancing. Since SCV and equities in general tend to outperform bonds significantly over the long-term, this is perfectly logical since the stocks will continue to grow and outpace bonds if the portfolio is never rebalanced.#Cruncher wrote:I'd like to see some evidence for this. It's quite possible I'm wrong in thinking that re-balancing usually improves returns. Unfortunately, willthrill81, the Vanguard report you cite doesn't address this question. It simply shows that over the period 1926-2015 portfolios performed better the higher the stock allocation. But it doesn't provide any information about the effect of re-balancing.willthrill81 in same post wrote:Rebalancing ... has not historically improved returns. According to Vanguard, every 10% increase in a portfolio's allocation to bonds has reduced the CAGR by .3% to .5%, and that's with annual rebalancing.
Altogether, this analysis of historical data strongly suggests to me at least that there is virtually no rebalancing bonus in practice, but that there could very well be a big rebalancing cost.
The Sensible Steward
Re: Vanguard Target Retirement 2065
well, over 40 years many things can change and you can't actually predict "expected return" based only on past performance... so that term is inherently misleading as typically used.willthrill81 wrote:...10% in bonds reduces the expected return by .4-.5% every year, which is a big crutch over a nearly 40 year period...
VG may have data that indicates that 10% bonds actually increases the expected return in a range of possible future scenarios (even if that wasn't the case based only on past results). Alternatively, it may be that it's just marketing: a TR fund that is only 1 or 2 stock funds for decades wouldn't sell.
Re: Vanguard Target Retirement 2065
Not reblancing will always look good after a long bull market. Rebalancing can provide a bonus if the rebalancing happens to occur at market lows and highs, but this is not possible to predict. Hence, rebalancing bonuses/losses tend to average out over varied market conditions.
- willthrill81
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Re: Vanguard Target Retirement 2065
If you won't use the relative long-term historical performance of asset classes to craft a portfolio, I don't know what else you would use. Perhaps your crystal ball is functioning better than mine.freebeer wrote:well, over 40 years many things can change and you can't actually predict "expected return" based only on past performance... so that term is inherently misleading as typically used.willthrill81 wrote:...10% in bonds reduces the expected return by .4-.5% every year, which is a big crutch over a nearly 40 year period...
At any rate, I can guarantee you that every TDF out there was crafted with long-term historical performance at the forefront of the reasoning.
VG's data going back to 1926 are quite clear that adding bonds has reduced a portfolio's long-term historical performance, which is expected by virtually every expert in the industry. I see no reason or point to disputing that.freebeer wrote:VG may have data that indicates that 10% bonds actually increases the expected return in a range of possible future scenarios (even if that wasn't the case based only on past results). Alternatively, it may be that it's just marketing: a TR fund that is only 1 or 2 stock funds for decades wouldn't sell.
The Sensible Steward
- willthrill81
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Re: Vanguard Target Retirement 2065
Unless you consider the last 45 years a long bull market, the data simply do not support the notion of a rebalancing bonus, which is a persistent myth with virtually no real data to support it.rkhusky wrote:Not reblancing will always look good after a long bull market. Rebalancing can provide a bonus if the rebalancing happens to occur at market lows and highs, but this is not possible to predict. Hence, rebalancing bonuses/losses tend to average out over varied market conditions.
Rebalancing maintains a desired level of risk but has not improved long-term historical returns. As I posted above, in many situations rebalancing can have a high cost.
The Sensible Steward
Re: Vanguard Target Retirement 2065
So maybe I used the term "data" loosely when I really meant "information" or "insights" (from VG, not me) - what I meant is that even though, yes, adding bonds has reduced a portfolio's long-term historical performance, that doesn't mean that this is expected to definitely continue into the future. After all, adding international stocks has reduced a portfolio's long-term historical performance over a US-only portfolio over the past decades but that's because of the great secular US bull market not something that can be counted on to persist into the future. Reducto ad absurdum, adding almost anything but AAPL to a portfolio would have reduced performance over the last 37 years but that doesn't mean an AAPL-only portfolio has highest expected returns over the next 37 years. It seems logical to me that VG planners may have rational reasons to favor a floor of 10% bonds for the next 37 years (TR 2065) even if that wouldn't have been optimal over the last 37 years.willthrill81 wrote:If you won't use the relative long-term historical performance of asset classes to craft a portfolio, I don't know what else you would use. Perhaps your crystal ball is functioning better than mine.freebeer wrote:well, over 40 years many things can change and you can't actually predict "expected return" based only on past performance... so that term is inherently misleading as typically used.willthrill81 wrote:...10% in bonds reduces the expected return by .4-.5% every year, which is a big crutch over a nearly 40 year period...
At any rate, I can guarantee you that every TDF out there was crafted with long-term historical performance at the forefront of the reasoning.
VG's data going back to 1926 are quite clear that adding bonds has reduced a portfolio's long-term historical performance, which is expected by virtually every expert in the industry. I see no reason or point to disputing that.freebeer wrote:VG may have data that indicates that 10% bonds actually increases the expected return in a range of possible future scenarios (even if that wasn't the case based only on past results). Alternatively, it may be that it's just marketing: a TR fund that is only 1 or 2 stock funds for decades wouldn't sell.
Re: Vanguard Target Retirement 2065
Right. Rebalancing always looks good at the bottom of a long bear market, as does having more bonds. Not rebalancing always looks good at the top of a long bull market, as does having less bonds. Bonds are insurance, and insurance has a cost, and a benefit when things go bad.willthrill81 wrote: Rebalancing maintains a desired level of risk but has not improved long-term historical returns. As I posted above, in many situations rebalancing can have a high cost.
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Re: Vanguard Target Retirement 2065
There's two overlapping effects - improved risk-adjusted returns through diversifying into a low-correlation asset (bonds), and the overall level of risks and returns through a lower equity exposure.
You can add back in risk and returns through leverage. It is a more complicated strategy than going straight 100% equities, though.
You can add back in risk and returns through leverage. It is a more complicated strategy than going straight 100% equities, though.
Current portfolio: 60% VTI / 40% VXUS
Re: Vanguard Target Retirement 2065
Thanks for mentioning Portfolio Visualizer. I hadn't seriously used it before. But now I see it's powerful and easy to use. First with the Backtest Portfolio Asset Allocation I confirmed the same results for VTSMX & VBMFX as in my previous post. Then I used Backtest Portfolio Asset Class Allocation for "US Stock Market" : "Intermediate Term Treasury". Here are the results for Jan 1972 - May 2017:willthrill81 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=3452699#p3452699]this post[/url] wrote:Just go to Portfolio Visualizer and compare different allocations between something like TSM and ITT (longer data than TBM but similar performance) with and without rebalancing. At least from 1972 to now, the differences I've seen range from zero to under 10 bps.
Code: Select all
------ 90:10 ------
100:0 0:100 No Rebal w Rebal
------- ------- -------- -------
Initial Balance 10,000 10,000 10,000 10,000
Final Balance 847,476 234,917 786,220 802,147
CAGR 10.27% 7.20% 10.09% 10.14%
Stdev 15.47% 5.91% 14.40% 13.94%
Best Year 37.82% 31.13% 34.78% 34.77%
Worst Year (37.04%) (4.33%) (34.92%) (32.00%)
Max. Drawdown (50.89%) (10.70%) (48.39%) (45.52%)
Sharpe Ratio 0.41 0.42 0.42 0.43
Sortino Ratio 0.59 0.66 0.60 0.62
US Mkt Correlation 1.00 0.08 1.00 1.00
Here is what Portfolio Visualizer shows for "US Small Cap Value" : "Intermediate Term Treasury" for Jan 1972 - May 2017:willthrill81, continuing, wrote:But with other asset classes, there has actually been a big cost to rebalancing. For instance, with a single $10,000 investment, a portfolio comprised of 50% SCV and 50% ITT rebalanced annually from 1972 to now had a CAGR of 11.26% but 12.70% if no rebalancing was used.
Code: Select all
------ 50:50 ------
100:0 0:100 No Rebal w Rebal
------- ------- -------- -------
Initial Balance 10,000 10,000 10,000 10,000
Final Balance 4,335,721 234,917 2,285,319 1,270,320
CAGR 14.30% 7.20% 12.70% 11.26%
Stdev 17.88% 5.91% 14.33% 9.63%
Best Year 54.78% 31.13% 36.82% 34.27%
Worst Year (32.05%) (4.33%) (28.50%) (9.82%)
Max. Drawdown (56.13%) (10.70%) (51.34%) (24.27%)
Sharpe Ratio 0.58 0.42 0.58 0.68
Sortino Ratio 0.86 0.66 0.85 1.03
US Mkt Correlation 0.89 0.08 0.87 0.85
I'm surprised you chose a 50:50 allocation, willthrill81. Here are the figures for a 90:10 SCV:ITT allocation which is more germane to the subject of this thread:
Code: Select all
------ 90:10 ------
100:0 0:100 No Rebal w Rebal
------- ------- -------- -------
Initial Balance 10,000 10,000 10,000 10,000
Final Balance 4,335,721 234,917 3,925,641 3,519,598
CAGR 14.30% 7.20% 14.05% 13.78%
Stdev 17.88% 5.91% 17.21% 16.14%
Best Year 54.78% 31.13% 50.00% 50.68%
Worst Year (32.05%) (4.33%) (31.63%) (27.52%)
Max. Drawdown (56.13%) (10.70%) (55.57%) (50.62%)
Sharpe Ratio 0.58 0.42 0.58 0.60
Sortino Ratio 0.86 0.66 0.86 0.88
US Mkt Correlation 0.89 0.08 0.89 0.89
Before this thread I assumed that re-balancing between stocks and bonds almost always increased return. Now I see this isn't so. Re-balancing them is still good; but as a way to maintain the risk level, not as a way to increase return.
- willthrill81
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Re: Vanguard Target Retirement 2065
You're welcome. I really like it. The Monte Carlo simulation is really useful too.#Cruncher wrote:Thanks for mentioning Portfolio Visualizer. I hadn't seriously used it before. But now I see it's powerful and easy to use.
It is indeed 'riskier' to not rebalance, but this is a bit of a 'false' risk in comparison to rebalancing. The additional risk from not rebalancing comes entirely from the added gain that would not have been present had the portfolio been rebalanced. In a very real way, it is only the 'extra' money you get from not rebalancing that is subject to the added risk.#Cruncher wrote:The effect of re-balancing is indeed significantly negative in this case as you say. But note how much riskier is the "50:50" allocation without re-balancing. This shouldn't be too surprising because without re-balancing what starts out as 50:50 ends up 95:5 [95% = 4336 / (4336 + 235)].
No reason it particular other than the fact that it illustrates that in most situations, portfolios that are not rebalanced have become increasingly stock heavy as the stocks gain more and more ground over bonds.#Cruncher wrote:I'm surprised you chose a 50:50 allocation, willthrill81.
Yes, the difference clearly shrinks as the portfolio becomes very stock heavy, but you know better than most what an additional .27% annual return can do to a portfolio over decades.#Cruncher wrote:The effect of re-balancing is still negative but only 0.27% points (14.05% - 13.78%).
Rebalancing is good in the sense that it maintains your desired AA and its associated risk, but it can be very bad in the sense of having a big cost associated with lower returns as well. Sure you can experience more volatility by not rebalancing, but the money being 'risked' is money you would not have had if you had rebalanced.#Cruncher wrote:Before this thread I assumed that re-balancing between stocks and bonds almost always increased return. Now I see this isn't so. Re-balancing them is still good; but as a way to maintain the risk level, not as a way to increase return.
I think that this persistent myth of a worthwhile rebalancing bonus comes from the idea that "you can buy stocks when they're cheap with your bonds," while not considering that the money in bonds is holding back the portfolio while the stocks are going up. Given that bull markets tend to surpass the bear markets, this strategy just doesn't pan out the way many think it does.
On another note, thank you for being so cordial in your response. The default response for most is to get very defensive and insist that their initial position is right come heck or high water. I respect your openness to new ideas.
The Sensible Steward