Single-year drift on four-fund LifeStrategy-like portfolios

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nisiprius
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Single-year drift on four-fund LifeStrategy-like portfolios

Post by nisiprius » Fri Jul 31, 2020 2:55 pm

Aw0k3n asked about a comparable ETF version of Vanguard LifeStrategy Growth (VASGX) and LifeStrategy Moderate (VSMGX). I suggested that if he just invested in the ETF versions of the four underlying funds, he could probably rebalance once a year and not see too much drift away from the target values.

So I decided to see how true that was.

I used real data from the Total Stock, Total International, and Total Bond mutual funds, using Investor shares because I have the data for them. For Total International Bond, it has only been available for a few years so I substituted the index values for the Bloomberg Barclay's Global Aggregate, Ex-US, USD-hedged. I used returns for 1997 through 2019 inclusive. For each year, I started with the target allocations and calculated what they would drift to at the end of the year. I then took the minimum and maximum values of the final allocations for each fund at the end of each year.

Here are the results. The drift was more than I expected it to be. I won't try to draw any other conclusions.

The first chart, for example, is saying that for an 80% stock portfolio, the allocations to Total Stock, Total International Stock, Total Bond, and Total International Bond were 48/32/14/6 (reflecting Vanguard's practice of dividing stocks 60/40 between US and international, and dividing bonds 70/30 between US and international). The target allocation for VTSMX was thus 48%, and at the end of one year the actual final allocation ranged from 43.72% to 53.92%.

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arcticpineapplecorp.
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Re: Single-year drift on four-fund LifeStrategy-like portfolios

Post by arcticpineapplecorp. » Fri Jul 31, 2020 3:08 pm

so are you suggesting if you want your percentages more close to VG's LS funds, you need to rebalance more than once a year?

I would assume VG rebalances more than once a year, so if you don't rebalance as frequently as they do, there'd surely be tracking error.

the question is how often should one rebalance to minimize the tracking error with VG LS?

Did you try to run in portfolio visualizer? Doesn't it have the ability to rebalance yearly, semi annually, quarterly, monthly or rebalance bands?

did you or would you rerun your numbers using these different rebalancing schedules to see if the tracking error reduces and by what amounts?

thanks for your work on this.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

lyrictulip
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Re: Single-year drift on four-fund LifeStrategy-like portfolios

Post by lyrictulip » Fri Jul 31, 2020 4:37 pm

I think the conclusion is that, if your "rebalancing band" is +/- 5%, then once-a-year rebalancing will be just fine. If your rebalancing band is tighter than that, then yes you would sometimes need to rebalance more frequently than once a year.

alex_686
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Re: Single-year drift on four-fund LifeStrategy-like portfolios

Post by alex_686 » Fri Jul 31, 2020 4:43 pm

arcticpineapplecorp. wrote:
Fri Jul 31, 2020 3:08 pm
the question is how often should one rebalance to minimize the tracking error with VG LS?
Daily.

That is how you would minimize tracking error. Not saying that is the best choice.

Different rebalancing strategies will generate different results under different market conditions. Is the market trend following or mean reverting? Is Volatility low, high, or changing? And there is not a dominate rebalancing strategy - it is like rock, paper, scissors.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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David Jay
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Re: Single-year drift on four-fund LifeStrategy-like portfolios

Post by David Jay » Fri Jul 31, 2020 4:48 pm

arcticpineapplecorp. wrote:
Fri Jul 31, 2020 3:08 pm
I would assume VG rebalances more than once a year...
Daily
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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