More Funds More Rebalancing Opportunities?

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spdoublebass
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More Funds More Rebalancing Opportunities?

Post by spdoublebass » Tue Jan 09, 2018 9:53 pm

TSM was -10.57% in 2000 and -10.97% in 2001. Those same years SCV was up 21.88% and 13.70%. I know I'm selectively picking two years, but when I see that data it makes me want to hold some SCV to be able to rebalance into TSM/Internatioal. Is this rational? or does this not matter in the long run?

For the Sake of this argument, I would only consider SCV, Int. Small Cap, and REIT's.

I understand these funds may not outperform the market, but I'm interested in funds that perform differently than the market.

I realize others tilt to try to outperform the market, but I'm more interested in having a few more funds to rebalance when one is down.
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Beehave
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Re: More Funds More Rebalancing Opportunities?

Post by Beehave » Sat Jan 13, 2018 4:04 pm

I'm not a quant who can give the full statistical analysis. But I think a lot like you do on this issue and here's my take.

- It's fun to take a fundamental allocation and then slice and dice to try to get an edge. As long as you don't start day trading and you stick with your allocations through appropriate rebalancing there's no harm.

- There's a value to having multiple funds, even if they overlap. While you can sell your ETF positions at will (assuming there's a market with buyers), there are limits on mutual fund transactions. So having two mutual funds instead of one may give you more flexibility for rebalancing or emergencies.

- Most important conclusion I've reached about this - - and I think it's at the heart of the popular Boglehead three fund strategy - - when push comes to shove, when you start to slice and dice it means you want to take on more risk for the possibility of more reward. Instead of complicating your life by slicing and dicing and worrying and brooding over things no one really knows the answers to, why not simply use a three fund strategy and just mildly change your allocations to add more percentage of stock (risk) to try to capture more reward if you feel the itch?

dbr
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Re: More Funds More Rebalancing Opportunities?

Post by dbr » Sun Jan 14, 2018 10:12 am

Why do you think rebalancing is an opportunity?

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JoMoney
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Re: More Funds More Rebalancing Opportunities?

Post by JoMoney » Sun Jan 14, 2018 10:20 am

Aside from maintaining ones risk profile, sometimes rebalancing is a missed "Momentum Opportunity" that has tax and transaction costs.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Random Walker
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Re: More Funds More Rebalancing Opportunities?

Post by Random Walker » Sun Jan 14, 2018 11:15 am

Multi asset class investing with non correlated asset classes will improve portfolio efficiency. The drag on returns caused by portfolio volatility will be lessened, Sharpe ratio improved, geometric return increased relative to simple average return, likely lower maximal drawdown.
The key is finding investments that are less than perfectly correlated, non correlated, or even negatively correlated. Unfortunately, some of the best diversifiers with equity like returns are expensive by BH standards. The best diversifier on a bang for the buck basis are cheap high quality bonds, but they lower the expected return of the portfolio. Although bonds are generally uncorrelated with equities, there is a tendency for the correlation to turn strongly negative when bonds are most needed.
The contribution of a potential new investment to a portfolio depends on it's expected return, volatility, correlations to other portfolio components, when the correlations change, and of course cost.

Dave

dbr
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Re: More Funds More Rebalancing Opportunities?

Post by dbr » Sun Jan 14, 2018 11:22 am

Random Walker wrote:
Sun Jan 14, 2018 11:15 am
Multi asset class investing with non correlated asset classes will improve portfolio efficiency. The drag on returns caused by portfolio volatility will be lessened, Sharpe ratio improved, geometric return increased relative to simple average return, likely lower maximal drawdown.
The key is finding investments that are less than perfectly correlated, non correlated, or even negatively correlated. Unfortunately, some of the best diversifiers with equity like returns are expensive by BH standards. The best diversifier on a bang for the buck basis are cheap high quality bonds, but they lower the expected return of the portfolio. Although bonds are generally uncorrelated with equities, there is a tendency for the correlation to turn strongly negative when bonds are most needed.
The contribution of a potential new investment to a portfolio depends on it's expected return, volatility, correlations to other portfolio components, when the correlations change, and of course cost.

Dave
How is this explanation to be interpreted as "more rebalancing opportunities"? Keep in mind that the total stock market already holds an allocation to the small cap value stocks suggested and that a TSM fund more or less constantly rebalances. As an aside, a TSM fund is already a multi asset class fund.

dbr
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Re: More Funds More Rebalancing Opportunities?

Post by dbr » Sun Jan 14, 2018 11:23 am

I think a good suggestion would be to read here: https://www.amazon.com/Your-Complete-Gu ... +investing

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Re: More Funds More Rebalancing Opportunities?

Post by spdoublebass » Sun Jan 14, 2018 11:27 am

dbr wrote:
Sun Jan 14, 2018 10:12 am
Why do you think rebalancing is an opportunity?
I'm sorry I used a trigger phrase or word.

I think you know what I mean. I didn't realize that SCV moved that differently from TSM those years. I thought they were much more correlated.
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Random Walker
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Re: More Funds More Rebalancing Opportunities?

Post by Random Walker » Sun Jan 14, 2018 11:39 am

DBR,
More investments that behave differently in a portfolio imply more rebalancing opportunities. Perhaps somewhat ironically, depending on correlations, the addition of a volatile asset class to a portfolio can actually dampen portfolio volatility. TSM certainly has exposure to small and value stocks, and it certainly internally rebalances. But it has no net exposure to the size and value factors. Historically, size has had low correlation to market, value uncorrelated with market, and size and value uncorrelated with each other. Having a net exposure to all three factors should improve portfolio efficiency. I think rebalancing is assumed in looking at portfolio efficiency.

Dave

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Re: More Funds More Rebalancing Opportunities?

Post by aristotelian » Sun Jan 14, 2018 11:47 am

The one benefit I see of more funds would be tax loss harvesting opportunities. I doubt rebalancing from one stock fund to another will have much effect.

dbr
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Re: More Funds More Rebalancing Opportunities?

Post by dbr » Sun Jan 14, 2018 11:50 am

spdoublebass wrote:
Sun Jan 14, 2018 11:27 am
dbr wrote:
Sun Jan 14, 2018 10:12 am
Why do you think rebalancing is an opportunity?
I'm sorry I used a trigger phrase or word.

I think you know what I mean. I didn't realize that SCV moved that differently from TSM those years. I thought they were much more correlated.
What I think you mean is that there is some sort of tactic out there for increasing the return of a portfolio by rebalancing per se. I don't think that is true. What does exist is an opportunity to increase the return of a portfolio by tilting to a greater concentration in higher returning assets and there is an opportunity to reduce risk by finding a more effective combination of uncorrelated assets. Factor models for investing consider how return can be improved by tilting to concentrations. That was originally shown in the Fama-French model for investment returns. I believe that if one wants to explore the benefits to portfolio efficiency by finding optimum allocations to hopefully uncorrelated assets, you can do that by looking at mean variance optimization. I think Financial Engines is a program that does that. I'm pretty sure that factor models for size and value anyway and mean variance models assume the portfolio is more or less continuously rebalanced to a selected desired target.

Another poster mentioned the relationship between rebalancing and exploiting the momentum factor. I don't know much about momentum, so you might look there. The reference I posted to the Swedroe book discusses the factors of market, size, value, momentum, and quality for stocks.

dbr
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Re: More Funds More Rebalancing Opportunities?

Post by dbr » Sun Jan 14, 2018 11:56 am

Random Walker wrote:
Sun Jan 14, 2018 11:39 am
DBR,
More investments that behave differently in a portfolio imply more rebalancing opportunities. Perhaps somewhat ironically, depending on correlations, the addition of a volatile asset class to a portfolio can actually dampen portfolio volatility. TSM certainly has exposure to small and value stocks, and it certainly internally rebalances. But it has no net exposure to the size and value factors. Historically, size has had low correlation to market, value uncorrelated with market, and size and value uncorrelated with each other. Having a net exposure to all three factors should improve portfolio efficiency. I think rebalancing is assumed in looking at portfolio efficiency.

Dave
Yes, I am familiar with all of that except the question of what is meant by a rebalancing "opportunity" and what sort of opportunity that is, possibly in the concept of momentum investing. As I stated in the post just above factor and mean variance methods always assume portfolios that are kept in balance, so one needs to find an explicit analysis of where something called a "rebalancing opportunity" actually exists. My suspicion is that a lot of people naively assume there is some sort of market timing opportunity here, "buy low/sell high" and I am not so sure rebalancing actually does any such thing. I admit I am not familiar with momentum as an investing factor.

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Re: More Funds More Rebalancing Opportunities?

Post by spdoublebass » Sun Jan 14, 2018 12:09 pm

dbr wrote:
Sun Jan 14, 2018 11:50 am
spdoublebass wrote:
Sun Jan 14, 2018 11:27 am
dbr wrote:
Sun Jan 14, 2018 10:12 am
Why do you think rebalancing is an opportunity?
I'm sorry I used a trigger phrase or word.

I think you know what I mean. I didn't realize that SCV moved that differently from TSM those years. I thought they were much more correlated.
What I think you mean is that there is some sort of tactic out there for increasing the return of a portfolio by rebalancing per se. I don't think that is true. What does exist is an opportunity to increase the return of a portfolio by tilting to a greater concentration in higher returning assets and there is an opportunity to reduce risk by finding a more effective combination of uncorrelated assets. Factor models for investing consider how return can be improved by tilting to concentrations. That was originally shown in the Fama-French model for investment returns. I believe that if one wants to explore the benefits to portfolio efficiency by finding optimum allocations to hopefully uncorrelated assets, you can do that by looking at mean variance optimization. I think Financial Engines is a program that does that. I'm pretty sure that factor models for size and value anyway and mean variance models assume the portfolio is more or less continuously rebalanced to a selected desired target.

Another poster mentioned the relationship between rebalancing and exploiting the momentum factor. I don't know much about momentum, so you might look there. The reference I posted to the Swedroe book discusses the factors of market, size, value, momentum, and quality for stocks.

I don’t think I said anything about increasing return. I just said is there a benefit to having these assets because they move differently, and you could use them to rebalance.

If I hold TBM that doesn’t increase my return. Yet we do and I rebalance with it.

I’m not arguing, I’m really just inexperienced and asking.

I’m ok/content with market weight. As stated in my OP, don’t people tilt to try to increase returns, I’m not interested in that because I’m happy with market weight and its returns. However, if these assets perform this differently I would be open to including them for these reasons.

I will look into the link you posted. My only knowledge on investing comes from reading this forum too much and the bogleheads guide to investing. Maybe what I’m asking about is factors and momentum.
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dbr
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Re: More Funds More Rebalancing Opportunities?

Post by dbr » Sun Jan 14, 2018 12:49 pm

I should perhaps apologize for asking a snarky question instead of offering the observation that:

Rebalancing is not an opportunity but rather a chore. The function of rebalancing is to keep the asset allocation where it is intended. A great benefit of a total stock market fund is that the distribution across sub-classes such as small cap, etc. is automatically kept in balance. If a person wants to own a separate allocation to something like that then along with that comes the chore of rebalancing. The chore is the buying and selling including possible costs, especially in taxable. There might conceivably be an opportunity for tax loss harvesting, as mentioned by someone.

There are people who assume that rebalancing is some sort of portfolio management technique for increasing return. My understanding is that this is, on average, not so, at least not if risk is taken into account.

The rest of this thread has include discussion of why one might not want the market weight of small cap value stocks. That is a legitimate discussion but has nothing to do with "opportunities" to rebalance but on the contrary assumes that one has assumed the burden of seeing that things are rebalanced to target. The reference to momentum becomes a question at the third order.

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Re: More Funds More Rebalancing Opportunities?

Post by spdoublebass » Sun Jan 14, 2018 5:22 pm

dbr wrote:
Sun Jan 14, 2018 12:49 pm
I should perhaps apologize for asking a snarky question instead of offering the observation that:

Rebalancing is not an opportunity but rather a chore. The function of rebalancing is to keep the asset allocation where it is intended. A great benefit of a total stock market fund is that the distribution across sub-classes such as small cap, etc. is automatically kept in balance. If a person wants to own a separate allocation to something like that then along with that comes the chore of rebalancing. The chore is the buying and selling including possible costs, especially in taxable. There might conceivably be an opportunity for tax loss harvesting, as mentioned by someone.

There are people who assume that rebalancing is some sort of portfolio management technique for increasing return. My understanding is that this is, on average, not so, at least not if risk is taken into account.

The rest of this thread has include discussion of why one might not want the market weight of small cap value stocks. That is a legitimate discussion but has nothing to do with "opportunities" to rebalance but on the contrary assumes that one has assumed the burden of seeing that things are rebalanced to target. The reference to momentum becomes a question at the third order.
No apology nessicary. Haha. This forum has saved my tail more times than I can count.

I left out some details that I should have stated. I only have tax deferred accounts.

My question really is what you are addressing though with the rebalancing concept. In my example those two years that SCV outperformed, is there any benefit to that? If I sold some and rebalanced into the other funds does it really matter? Would it matter if I didn’t have small cap at all in the end?

Also, for my situation, I don’t have a need to rebalance now, mainly because my accounts are small and I “rebalance” by just adding new money. Haha.
Resist much, obey little.

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