moda0306 wrote: ↑Mon Oct 10, 2011 12:10 pm
I really think using the past rebalance comparisons to give any kind of false precision on rebalance bands is a bit much.
The longer an asset tends to trend, year by year, to do the same thing as it did in prior years, the more you will benefit from wider bands.
If you end up with a relatively long period of all three assets swinging wildly in opposition to their prior-year behavior, a 30/20 band setup will work better.
Lastly, assuming the correlations hold up, if you are at 34/16 of two of the assets, you are in a position where one is over twice as heavily weighed as the other. This could really hammer you if the higher asset retreats strongly, and with only 16% of a diversifier to help soften the blow.
This isn't to say I don't believe in wider bands. In fact, I think I'd stick with 35/15 bands. I just like to fully understand the reason wider bands have succeeded, and the risks I'm running by assuming it will behave that way in the future.
The thing I like about 35/15 bands, is that they are a very good way, over a lifetime, of simultaneously capturing momentum (waiting longer to sell a booming asset), and using some of that gain to buy other assets low, which allows the portfolio to become more than a sum of its parts.
In fact, I actually thing, especially for a taxable account rebalance, doing partial rebalances back to 20/30 from 35/15 is appropriate. It keeps them in the "risk zone" you want them in, further rewards your best assets by on paring them back so much, and is more tax-efficient.
Agreement / disagreement on the above highlighted point?