slightly confused about rebalancing

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christina
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slightly confused about rebalancing

Post by christina » Sat Oct 08, 2011 9:15 am

I'm a little bit confused about when you're supposed to rebalance.
are you supposed to monitor your portfolio constantly, and rebalance immediately when one investment goes beyond one of the bands?
or are you supposed to pick a date, once a year, to look at your portfolio, and then rebalance at the bands? (I think Harry b. recommends this.)
or are you supposed to use your judgment about when to rebalance, as I belive craigr uses? (I believe I would not be able to do this successfully. I think I would prefer a more mechanical approach.)

what about rebalancing quarterly? I heard that returns might be better with more frequent rebalancing, but I'm not sure. I will likely be holding my portfolio as a set of ETFs that are freely tradable, so trading costs are not an issue for me.

Thanks!
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Re: slightly confused about rebalancing

Post by TripleB » Sat Oct 08, 2011 10:32 am

HB suggests you use the 15/35 band method. When any investment hits that band, then rebalance the whole thing back to 4x25. HB also says you can rebalance once a year if you want. The point is not to rebalance too frequently due to trading costs, tax costs, and also reduction of momentum affects.

If you are making new contributions continuously, and directing them towards the lowest level asset, then you may never have to rebalance officially, because you will never hit a band. Historically if you start with 4x25 and do nothing, you might only have to rebalance (hit a band) every 2 years or so.

One good thing about the PP is not having to look at the portfolio daily. If you check on it every few months, it will be fine. Unless you hear on the news that the stock market dropped 50%, you probably don't have to worry about rebalancing outside of checking it every few months.
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Re: slightly confused about rebalancing

Post by melveyr » Sat Oct 08, 2011 10:40 am

I don't have this spreadsheet on my computer (its at my parents computer), but I discovered (using annual returns) that the 15/35 bands gave a higher return than annual rebalancing or 20/30 rebalancing.

I think checking once a year to see if you have hit your bands would be fine. That is basically what this spreadsheet did.
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Re: slightly confused about rebalancing

Post by moda0306 » Sat Oct 08, 2011 10:46 am

I think it's safe to say the 15/35 bands work better historically because all three volatile assets had long periods of ascent and decline.  This is bound to result in wider bands being beneficial.  I'm not saying things won't continue that way, but if we have smaller, choppier swings out of these assets in the coming years the smaller bands will work better going forward.
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Re: slightly confused about rebalancing

Post by clacy » Sat Oct 08, 2011 10:53 am

Has anyone looked into the paper titled Opportunisitc Rebalancing: A New Paradigm for Wealth Managers

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

There is a bogleheads discussion on this strategy linked here:

http://www.bogleheads.org/forum/viewtop ... sc&start=0
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Re: slightly confused about rebalancing

Post by SteveGo » Sat Oct 08, 2011 11:07 am

Hi Christina,

Re-balancing more frequently does not improve your return. Instead, it reduces your risk (volatility), which is also good.

Depending on your personal response to the "whims of the market," you can monitor your portfolio daily, monthly, quarterly, or annually. If looking at it bothers you when it is moving down, then monitor it less frequently, if it does not bother you, then monitor it more frequently.

This also depends on your own commitment to "follow the plan." For me, I look at things almost every day. I am not troubled by the random swings of the market, because I believe in my plan.

For me, being ready to rebalance when something "hits a band," is cool and prudent.

My own backtests show what I said at the top. The more you rebalance, the lower the risk, and consequently the lower the return, but not by too much. Do whatever you can sleep on.

Take care.


christina wrote: I'm a little bit confused about when you're supposed to rebalance.
are you supposed to monitor your portfolio constantly, and rebalance immediately when one investment goes beyond one of the bands?
or are you supposed to pick a date, once a year, to look at your portfolio, and then rebalance at the bands? (I think Harry b. recommends this.)
or are you supposed to use your judgment about when to rebalance, as I belive craigr uses? (I believe I would not be able to do this successfully. I think I would prefer a more mechanical approach.)

what about rebalancing quarterly? I heard that returns might be better with more frequent rebalancing, but I'm not sure. I will likely be holding my portfolio as a set of ETFs that are freely tradable, so trading costs are not an issue for me.

Thanks!
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Re: slightly confused about rebalancing

Post by edsanville » Sun Oct 09, 2011 8:48 pm

I've run a few backtests using different rebalancing bands.  The tests only go from 2004-present, because I used ETF data to do them, (GLD, TLT, VTI).  Here's what I found:

Rebalancing band: 25%-25%   Annualized returns: 8.770407%  (rebalance every day no matter what!)
Rebalancing band: 24%-26%   Annualized returns: 8.736676%
Rebalancing band: 23%-27%   Annualized returns: 8.730892%
Rebalancing band: 22%-28%   Annualized returns: 8.633693%
Rebalancing band: 21%-29%   Annualized returns: 8.609356%
Rebalancing band: 20%-30%   Annualized returns: 8.801298%
Rebalancing band: 19%-31%   Annualized returns: 8.746533%
Rebalancing band: 18%-32%   Annualized returns: 8.755651%
Rebalancing band: 17%-33%   Annualized returns: 8.593875%
Rebalancing band: 16%-34%   Annualized returns: 9.144876%
Rebalancing band: 15%-35%   Annualized returns: 9.225508%
Rebalancing band: 14%-36%   Annualized returns: 9.533811%
Rebalancing band: 13%-37%   Annualized returns: 8.762806%
Rebalancing band: 12%-38%   Annualized returns: 8.644704%
Rebalancing band: 11%-39%   Annualized returns: 8.620474%
Rebalancing band: 10%-40%   Annualized returns: 9.013725%
Rebalancing band:  9%-41%   Annualized returns: 9.110751%
Rebalancing band:  8%-42%   Annualized returns: 8.773225%
Rebalancing band:  7%-43%   Annualized returns: 8.848743%
Rebalancing band:  6%-44%   Annualized returns: 8.962410%
Rebalancing band:  5%-45%   Annualized returns: 9.100235%

So, it looks like the results agree fairly well with the other posters here:  rebalancing more often doesn't improve your yields.  The 15-35% band seems to be in a "sweet spot,"  although that could just be a lack of data.  If you take into account transaction costs, of course, then the more frequent balancing will lose a bit more.
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Re: slightly confused about rebalancing

Post by moda0306 » 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.
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Re: slightly confused about rebalancing

Post by moda0306 » Mon Oct 10, 2011 1:11 pm

Clive,

I'd say there's a very definite risk-factor you're not considering.  The PP is designed first to preserve wealth, with growth as a secondary concern.  Holding assets at a 34/16 split gives you a very different risk exposure than 25/25 or 34/16 the other way.  Bands are designed to outline a point outside of which the risk you are running is no longer tolerable.  This is the PP in "wealth preservation" mode.

This also has the added benefit, when holding assets that are opposed for fundamental macroeconomic reasons, of forcing you to buy low and sell high, which helps the portfolio do better over long periods than one would think given the performance of the individual assets side-by-side.  This mimics the idea of stock-picking (buying "cheap" stocks to sell when they're "expensive), but is really done with the main purpose of risk-management of the portfolio and preventing large losses by having a portfolio too out of whack.

Stock picking doesn't have that trait... rarely when picking stocks is someone doing so to prevent a large drawdown of their portfolio.  They're doing so to get a good deal, and if they're simply selling other stocks to do so, its especially pointless in terms of drawdown risk.  This is where I see the two as fundamentally different.
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Re: slightly confused about rebalancing

Post by dualstow » Mon Oct 10, 2011 3:16 pm

christina wrote: what about rebalancing quarterly? I heard that returns might be better with more frequent rebalancing, but I'm not sure.
Thanks!
Harry definitely mentioned that once upon a time he suggested rebalancing at 30% instead of 35% and that he eventually came to the conclusion that it did not help returns. So, 15/35. I can't remember whether this is one of his books or in one of his radio show episodes, but I'm positive that's what he said.
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Re: slightly confused about rebalancing

Post by moda0306 » Mon Oct 10, 2011 3:47 pm

I think one has to get creative, and not just look back at historical returns, to judge a 15/35 band on its merits.

If you are at 34% stocks, 34% gold, 16% bonds and 16% cash, and we hit a hard depression, you could be especially crushed if gold decides to drop, too (though it appears that it may not "want" to do that in a depression).

I'm willing to take the risk or at least watch out for that kind of exposure, but 68% of your portfolio could easily tank, with half of your offsetting assets being non-volatile cash, and the other 16% of your portfolio having to do all the heavy lifting.

I look at the bands in terms of what's possible going forward, not necessarily what the last 40 years have returned.  A 15/35 band opens one up to some very serious exposure if things are set just right.
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Re: slightly confused about rebalancing

Post by dualstow » Mon Oct 10, 2011 8:36 pm

I think the key is your second paragraph. That is, gold would more likely be through the roof on the eve of a depression, forcing you to rebalance months before (and hell, *during*) the recognition of a depression, not hovering at 34%.

Of course, Harry Browne also said that he picked the 25% shares for simplicity, so I don't think it would kill you to take profits at 34% or to ignore your portfolio while lounging in Ubud, Bali at 36%. I saw that some of you knocked gold back to 30% well before that $100-in-one-day drop.
Last edited by dualstow on Mon Oct 10, 2011 8:38 pm, edited 1 time in total.
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Re: slightly confused about rebalancing

Post by edsanville » Mon Oct 10, 2011 9:51 pm

I fully agree that the quantitative analysis may be a bit much, but I did it for one main reason:  I don't like doing something arbitrary without understanding why I'm doing it.  So, my initial question was "why 15/35?"

From the analysis I did, it does turn out that the exact rebalancing band doesn't matter as much as I thought it might.  Rebalancing every day is within a percentage point of rebalancing at a 5/45 band!  That's pretty interesting information right there, if you ask me.  I'm sticking with 15/35, myself.  My curiosity has been satisfied.
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Re: slightly confused about rebalancing

Post by vnatale » Wed Jan 15, 2020 8:45 pm

What are current thoughts regarding this? And, more importantly, what IS YOUR rebalancing method, e.g., how frequently, what triggers it?

Vinny
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Re: slightly confused about rebalancing

Post by Kbg » Wed Jan 15, 2020 10:36 pm

Rebalancing benefits or costs are completely path dependent. There is really no solid "evidence" statistically for one method over another. That's the bottom line. The standard line, which I concur with, is that rebalancing is primarily about risk not performance.

In/assuming a taxable account, one can mess around with different methods to see what the tax hit is which is a useful exercise. Such an approach looks at frequency of trades and assesses the distribution of ST and LT capital gains taxes and then adjusts performance expectations accordingly.
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Re: slightly confused about rebalancing

Post by KevinW » Tue Feb 04, 2020 12:36 pm

Monthly deposits go into cash. I check the portfolio annually with a calendar reminder, and also after a major finance-related world event that everyone's talking about (e.g. 9/11 or the 2008 global financial crisis). If it's within the 15/35 bands I do nothing, otherwise I rebalance to 4x25. (IIRC this is precisely Browne's advice on the radio show.)

For the first 10 years or so of accumulation, after every annual check cash was overweight and I bought the other assets. Now that the portfolio is larger relative to deposits, I don't necessarily have to rebalance every time. So far I've never sold stocks/bonds/gold.
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Re: slightly confused about rebalancing

Post by vnatale » Sun Mar 01, 2020 5:54 pm

Did these past week's events cause any of you to rebalance? If so, what bands that you are using were crossed?

Vinny
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Re: slightly confused about rebalancing

Post by sophie » Mon Mar 02, 2020 8:21 am

Think it's a bit early to rebalance yet. A 10% drop in one asset, especially one that was probably over-weighted going in, isn't going to shift your asset percentages by more than 3-5%.

However, this is absolutely a tax loss harvest opportunity! I was going to do it on Friday, but decided to wait and see what happened today. So far, that was the right move. Anyone thinking same?
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Re: slightly confused about rebalancing

Post by drumminj » Mon Mar 02, 2020 9:11 am

I've never tax-loss harvested before, but understand the basic concept. You can't purchase the same security for 30 days though to avoid the wash sale rule though, right? So what are you thinking of selling, and will you simply sit in cash for the 30 days, potentially missing a bounce back as central banks flood the world with liquidity?
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Re: slightly confused about rebalancing

Post by Xan » Mon Mar 02, 2020 10:28 am

drumminj wrote:
Mon Mar 02, 2020 9:11 am
I've never tax-loss harvested before, but understand the basic concept. You can't purchase the same security for 30 days though to avoid the wash sale rule though, right? So what are you thinking of selling, and will you simply sit in cash for the 30 days, potentially missing a bounce back as central banks flood the world with liquidity?
My understanding is that there isn't a formal definition of when two investments are "too close" and thus fall under wash sale rules.

If you're swapping an S&P 500 index for a total market index, I think it would be hard for the IRS to claim those are the same. Or a closed-end gold fund for an open-ended gold fund. Or a Treasury with 20 years left for one with 30 years left.

Basically, I think (but nobody can say for sure) that there are a lot of ways to get sufficient coverage during the 30-day window without falling afoul of the wash sale rules.
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Re: slightly confused about rebalancing

Post by pmward » Mon Mar 02, 2020 10:54 am

I harvested some IJS (S&P 600 value) for VBR (CSRP small cap value).

Also, I put my full yearly bonus that I got on Friday into stocks, which is technically a rebalance without selling anything. It worked out quite nicely as for the last 4 months or so while stocks had been blowing up all my new cash was going into bonds during their pullback. Now bonds are ripping, stocks are pulled back, and my fresh funds are all going into stocks. I like buying long term assets when they are down, I hate having to buy an asset that is at a high, though I still do it if the asset is the lowest.
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Re: slightly confused about rebalancing

Post by sophie » Tue Mar 03, 2020 8:07 am

I spoke too soon yesterday :-) but looks like the market will drop again today, so I'm pulling the trigger.

I switch to a stock fund just different enough to avoid the wash sale. For Vanguard I switch between the passive and tax managed fund versions. For Fidelity it's a bit harder. I have to switch between total market and small cap funds. You hold the new fund for at least 30 days. If it gains a lot in the meantime, I'll just hang on to it. If it loses, all the better, just sell it to claim some more losses.

WARNING: check to make sure you haven't done any reinvestment of dividends/gains in the last 30 days!!! And obviously don't sell any lots less than 30 days old.
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Re: slightly confused about rebalancing

Post by vnatale » Thu Apr 16, 2020 7:36 pm

KevinW wrote:
Tue Feb 04, 2020 12:36 pm
Monthly deposits go into cash. I check the portfolio annually with a calendar reminder, and also after a major finance-related world event that everyone's talking about (e.g. 9/11 or the 2008 global financial crisis). If it's within the 15/35 bands I do nothing, otherwise I rebalance to 4x25. (IIRC this is precisely Browne's advice on the radio show.)

For the first 10 years or so of accumulation, after every annual check cash was overweight and I bought the other assets. Now that the portfolio is larger relative to deposits, I don't necessarily have to rebalance every time. So far I've never sold stocks/bonds/gold.
So....how many times have you checked in 2020??!!

Vinny
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Re: slightly confused about rebalancing

Post by vnatale » Thu Sep 09, 2021 10:41 am

moda0306 wrote:
Sat Oct 08, 2011 10:46 am

I think it's safe to say the 15/35 bands work better historically because all three volatile assets had long periods of ascent and decline.  This is bound to result in wider bands being beneficial.  I'm not saying things won't continue that way, but if we have smaller, choppier swings out of these assets in the coming years the smaller bands will work better going forward.


Now with the benefit of being able to add in ten more years to "historically"...you still hold to the same analysis?
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Re: slightly confused about rebalancing

Post by vnatale » Thu Sep 09, 2021 10:44 am

edsanville wrote:
Sun Oct 09, 2011 8:48 pm

I've run a few backtests using different rebalancing bands.  The tests only go from 2004-present, because I used ETF data to do them, (GLD, TLT, VTI).  Here's what I found:

Rebalancing band: 25%-25%   Annualized returns: 8.770407%  (rebalance every day no matter what!)
Rebalancing band: 24%-26%   Annualized returns: 8.736676%
Rebalancing band: 23%-27%   Annualized returns: 8.730892%
Rebalancing band: 22%-28%   Annualized returns: 8.633693%
Rebalancing band: 21%-29%   Annualized returns: 8.609356%
Rebalancing band: 20%-30%   Annualized returns: 8.801298%
Rebalancing band: 19%-31%   Annualized returns: 8.746533%
Rebalancing band: 18%-32%   Annualized returns: 8.755651%
Rebalancing band: 17%-33%   Annualized returns: 8.593875%
Rebalancing band: 16%-34%   Annualized returns: 9.144876%
Rebalancing band: 15%-35%   Annualized returns: 9.225508%
Rebalancing band: 14%-36%   Annualized returns: 9.533811%
Rebalancing band: 13%-37%   Annualized returns: 8.762806%
Rebalancing band: 12%-38%   Annualized returns: 8.644704%
Rebalancing band: 11%-39%   Annualized returns: 8.620474%
Rebalancing band: 10%-40%   Annualized returns: 9.013725%
Rebalancing band:  9%-41%   Annualized returns: 9.110751%
Rebalancing band:  8%-42%   Annualized returns: 8.773225%
Rebalancing band:  7%-43%   Annualized returns: 8.848743%
Rebalancing band:  6%-44%   Annualized returns: 8.962410%
Rebalancing band:  5%-45%   Annualized returns: 9.100235%

So, it looks like the results agree fairly well with the other posters here:  rebalancing more often doesn't improve your yields.  The 15-35% band seems to be in a "sweet spot,"  although that could just be a lack of data.  If you take into account transaction costs, of course, then the more frequent balancing will lose a bit more.


Have any of you done a more recent, updated similar analysis?
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