Author Topic: Do you rebalance?  (Read 2620 times)

schoenbauer

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Do you rebalance?
« on: November 03, 2013, 06:56:21 AM »
Hey everyone,

I was just wondering if YOU are rebalancing. And if so, are you solely comparing current p/e ratios of your funds with their corresponding historical values and just sell some of the funds with the highest positive difference? or do you have other parameters as well? or are you just rebalancing in terms of achieving a constant asset allocation?

AND: is there scientific proof that rebalancing lets you come out ahead or is it just causing fees?

Thanks!

Nords

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Re: Do you rebalance?
« Reply #1 on: November 03, 2013, 09:50:34 AM »
... are you solely comparing current p/e ratios of your funds with their corresponding historical values ...
Hunh?

Our retirement portfolio has four assets (plus ~8% in cash).  We like to keep each asset at 18-28% of the total, and we rebalance when one of them gets outside of that range.  The "rebalancing" part happens once or twice every 2-3 years.

AND: is there scientific proof that rebalancing lets you come out ahead or is it just causing fees?
"Scientific" as in reproducible experiments, or perhaps proof as in "mathematical" or "statistical"?

I don't think you're going to find "proof" one way or another.  What you're going to find is that rebalancing's benefit depends on investor behavioral psychology ("sleep at night" tolerance for volatility), the comfort of a routine annual portfolio review & adjustment, and on the expenses of rebalancing.  You're also going to find that rebalancing is less effective than building a diversified portfolio of low-cost index funds and value-averaging new savings into that portfolio. 


schoenbauer

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Re: Do you rebalance?
« Reply #2 on: November 03, 2013, 10:07:44 AM »
Thanks!

... are you solely comparing current p/e ratios of your funds with their corresponding historical values ...
Hunh?

Thatīs a suggested technique for rebalancing as described by MMM here: http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/

...we rebalance when one of them gets outside of that range.

I think this will be my strategy as well.

proof as in "mathematical" or "statistical"?

Proof as in "statistical". I would like to know if rebalancing pays of eventually in the long run or if it only causes additional expenses. I would assume - if the efficient market hypothesis is true - that rebalancing doesnīt add more performance but rather provides a volatility fitting to ones AA.

Michread

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Re: Do you rebalance?
« Reply #3 on: November 03, 2013, 10:20:10 AM »
No, we do not rebalance.  We may change funds (rarely) but do not rebalance our 90/10.  BTW, we are millionaires after 20+ years of investing.

Zaga

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Re: Do you rebalance?
« Reply #4 on: November 03, 2013, 11:21:15 AM »
My  primary form of rebalancing is through changing where I contribute.  Right now I'm low on bonds and a bit high on everything else, so I just changed all of my contributions to bonds.  This will continue until I'm back where I want to be.

I also will occasionally sell something and buy something else to rebalance, but not often.  Also, this is done inside tax advantaged accounts, so as long as there are all index funds, there shouldn't be any added fees or taxes for doing this.  If I had any taxable investments, I would try to structure things so that all of my rebalancing happened within my tax advantaged accounts.

Siamond

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Re: Do you rebalance?
« Reply #5 on: November 09, 2013, 08:34:29 PM »
Yes, I rebalance, annually, to re-align to my Asset Allocation plan. I don't touch anything unless there is at least a 5% misalignment though.

If you want to study a thorough analysis of the rebalancing 'bonus', this is the article to read: http://www.efficientfrontier.com/ef/996/rebal.htm

Most people seem to use rebalancing mostly to maintain a constant AA and a constant level of risk (in their own definition). The bonus is a tiny bit of icing on the cake, but one of those things only true on average on the long run, which does NOT automatically mean it will work for you...