I’m trying to figure out if I’m rebalancing myself crazy for no reason.
Let’s say, for simplification’s sake, that Vanguard’s Total World Stock Index, or VTWS (I’m making this up), today consists of 60% US, 30% Developed Foreign , and 10% Emerging Markets.
Let’s also say that my target AA is also 60% US, 40% Developed Foreign, and 10% Emerging Markets. I have a choice between holding all VTWS or holding three different index funds to match my AA.
If I go the one fund way: As time goes by, VTWS drifts as economies change – that’s what broad indices do, they don’t hold steady percentages, they just follow what’s out there. So VTWS will no longer match my AA. But that’s not even my main concern. If I’m in just this one broad index, I’m missing out on gains captured when rebalancing between my three buckets as they rise and fall relative to each other. Right?
If I go the three fund way: I’ve got to mess with rebalancing annually, quarterly, whenever.
Now, I don’t mind rebalancing. I’ve got a cool spreadsheet, everything is a Vanguard, I’m smart about not incurring transaction fees, etc. But, I’m not so sure I’m going to want to mess with it as I age.
So, this is really a math problem. If one’s AA is similar to a broad index, is holding smaller, more specialized buckets going to yield a greater return?