Portfolio rebalancing opinions

This is for the asset allocators out there:

How do most of you handle rebalancing? The main triggers I encounter are time and drift.

Obviously time is simpler to handle and as long as the rebalance is over a year, growth is taxed at cap gains.

Drift (often triggered by +/- 5%) is mathematically more precise but CAN produce short-term capital gains. More diligent monitoring is also required, but that is not necessarily a bad thing.

Does anyone here not rebalance an asset allocation at all (as the result of a monitored and conscious decision, not neglect)? Has drift really been severe enough over longer periods of time (> 10 years) to warrant the costs associated with rebalancing?

Thanks for the thoughts.

Reply to
kastnna
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I rebalance each year in the first week of January but I do not stick with static asset allocation percentages. I try to do most of the rebalancing within my retirement accounts so as not to cause taxable events. As I get older I am slowing putting more assets as a percentage of my total portfolio in cash and bonds - I think my appetite for risk is decreasing with age. Last December I took my first MRD from my IRA and I withdrew that from a large stock fund and also transferred some more money from the large stock fund to a multi sector bond fund. To help simplify things in my old age I now have all of my retirement accounts with Fidelity and non- retirement accounts at Vanguard. I use their portfolio analysis tools at each site to help me decide on the rebalancing moves.

Regards, BeachBum

Reply to
BeachBum

I rebalance twice. June/July timeframe and Dec/Jan timeframe.

In June/July I tweak contribution percentages. My typical allocation is 45% large cap, 15% mid cap, 15% small cap, 15% international large cap and 10% small cap. If I think something needs tweaking (less money or more), I might switch percentages by 5%.

In December/January I look to see if contributions affected the "allocation" and buy/sell as needed to meet the requirements.

A few points, some funds in 401ks charge short term redemption fees, so it's important to watch that. By doing twice a year, I know I think carefully about rebalancing twice each year. I could not tell you my allocation "today", but this strategy forces me to look deeply twice a year.

Reply to
jIM

First, most of our assets are in tax-deferred accounts, and there are no costs associated with rebalancing. Some of our funds are in Vanguard's LifeStrategy series, bought specifically so I don't have to think about rebalancing. BUT, about half of our retirement funds are in an account with about 6 funds. I have consciously not done any rebalancing for several years. While things are getting further from their target allocations, the fund furthest from its target percentage is a bond fund. While I monitor this account regularly, I have consciously chosen not to take from the winners, just to plunk it into this bond fund. I never thought I'd be one for market timing, BUT taking money out of the stock market and putting it into the bond market seems pretty stupid, and has seemed so for the past 3 years.

Elizabeth Richardson

Reply to
Elizabeth Richardson

Rebalancing is contrary to my financial goal.

My goal is to maximize growth subject to reasonable risk. To protect against excessive risk, I invest only in mutual funds, limit my portfolio of agressive mutual funds to less than 20% of my portfolio and maintain five years of income in bonds or near bonds.

My agressive mutual funds are about 10% and an increase in the value of my equities does not automatically increase the amount I maintain in bonds.

Reply to
FranksPlace2

I don't understand. Suppose you've got 20K in "aggressive MFs" and 80K in all other investments. Hypothetically the agressive funds double in value and the others stay the same. You just went from a 20% to a 33% allocation of aggressive holdings. So one of your rules is violated:

1) you have greater than 20% agressive holdings or 2) you have to rebalance.

Following the risk/return trade-off you also increase the "reasonable risk" of your portfolio as the % of agressive holdings increases.

Sorry for the confusion, but your statement lost me.

Reply to
kastnna

Vanguard Institutional Investors site has an informative paper titled "Portfolio rebalancing in theory and practice" at

institutional.vanguard.com/VGApp/iip/Research?IIP_INF=ZZ

Do note that the most effective way to implement your chosen rebalancing strategy is with new money (avoiding sales and shence avoiding tax costs).

David

Reply to
David Moore

kastnna,

Theoretically you are correct. But it hasn't happened yet because I am only at half my limit and my agressive portfolio does not perform that much better than my market portfolio.

Frank

Reply to
FranksPlace2

asset allocators out there:

Remember the risk (volatility) of holding *any* equity fund is much greater than the risk of holding most fixed income (perhaps with the exceptions of emerging market and high yield bonds or convertible bonds).

Annual volatility of returns on bond funds are on the order of +/- 10% (worst year in the last 20). Annual returns on equity funds are on the order of +/- 30% (c. -40%, if you took the worst 18 month period since 1985, I believe)-- in practice although there have been -20% days in the stock market (and there would be again, if, say, Al Quaida manages to detonate a radiological bomb in central London or NYC, or a major hedge fund implodes), markets usually rebound a bit after that.

So aggressive stock funds or not, your real risk comes from holding stocks/equities. Whether a fund is 10 or 20% riskier than the index as a whole is somewhat academic.

To hedge what I have said a bit, funds focusing on high risk sectors (Nasdaq, Emerging Markets) can have volatility which is a multiple of that of your average equity index fund. In 1994 during the Mexican crisis, and again in 1997during the SE Asian crisis, emerging markets globally fell by something like 50%. And Nasdaq bottomed at less than

1/3rd of its peak 2.5 years earlier. (I'm pulling those numbers out of my head, without googling them).

Interestingly, when those 'high risk'/ bubble sectors and funds blow up, they take years to recover, whereas the broader markets can recover more quickly. What happens with the funds is they usually get closed/ merged with other funds, so the performance record is erased from the Fund Management company's track record.

Reply to
darkness39

I understand that. That's why I hold five years of income in bonds. However I occasionally toss and turn at turn at night thinking about the gain foregone by having this much in bonds.

Frank

Reply to
FranksPlace2

A question regarding that strategy - using the 4% rule, 5 years is about

20% in cash/bonds. Do you reduce this by the cash dividends of your stock portfolio? 2% (for example) yield would provide half the 4% you'd need for spending, and allow you to have 10% in cash/bonds to make up the difference. JOE
Reply to
joetaxpayer

Usually we think of highly aggressive portfolio allocations causing loss of sleep. But this is a good example of an allocation that is probably too conservative. We should all be striving for an allocation that allows us to sleep at night.

Elizabeth Richardson

Reply to
Elizabeth Richardson

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