Author Topic: Rebalancing your indices when one outperforms  (Read 805 times)

logjammin

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Rebalancing your indices when one outperforms
« on: January 12, 2023, 04:42:45 PM »
I'm a believer in the typical buy lowcost indices approach that's often advocated by moustachians.

However, after some reading and analysis that by no means made me an expert, I decided to slightly buck the trend and purchase a Mexico ETF (EWW from iShares, 0.50% expense ratio). That has turned out to be a lucky trade since its purchase relative to my main holding, VTI:

EWW (since Aug. 30, 2022): 56.49/45.17 = up 25.1%

VTI (since Aug. 30, 2022): 199.19/200.03 = minus 0.4%

All the reasons I loved Mexico as an underrated growth economy are of course still there, but who the heck knows whether or not the EWW price has "caught up" to value.


My question is: Do you think its sound advice to sort of "rebalance" your winning indices? Since I have one that has greatly outperformed the other, does it make sense to sell the winner while it's ahead, especially since in a long run -- all else equal -- the higher expense ratio would chip away at its potential?

Or, is ETF and stock-picking at least mostly poppycock and I might as well hold onto EWW as long as I already have it, especially since I still see Mexico as probably the best country in the world for a long term play (not sure if that applies though after it's run up since I purchased it) ?

Or -- and I feel this third option is the most likely -- am I a big ignoramus and missing the point about something, not even asking the right questions?

PDXTabs

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Re: Rebalancing your indices when one outperforms
« Reply #1 on: January 12, 2023, 04:54:29 PM »
My question is: Do you think its sound advice to sort of "rebalance" your winning indices? Since I have one that has greatly outperformed the other, does it make sense to sell the winner while it's ahead, especially since in a long run -- all else equal -- the higher expense ratio would chip away at its potential?

I too own some EWW and it is the second best performing asset in my brokerage account. I think that, ignoring tax implications, it makes sense to re-balance and in doing so take some of those gains (EDIT: and reallocate them to your preferred asset allocation). Because I own my EWW in a taxable account I won't sell any, but I also won't buy any more until it is inline with my preferred asset allocation.

Or, is ETF and stock-picking at least mostly poppycock and I might as well hold onto EWW as long as I already have it, especially since I still see Mexico as probably the best country in the world for a long term play (not sure if that applies though after it's run up since I purchased it) ?

If "demography is destiny" then Mexico should do great. But Mexico is pretty reliant on the USA, and is only ~0.3% of the world stock market, so I wouldn't put all my eggs in that basked.
« Last Edit: January 12, 2023, 06:01:07 PM by PDXTabs »

Heckler

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Re: Rebalancing your indices when one outperforms
« Reply #2 on: January 12, 2023, 06:23:37 PM »
sorry to sound like (at best) a repeating record (or at worst) an ass...

What is your IPS say to do?

https://www.bogleheads.org/wiki/Investment_policy_statement#Asset_allocation_targets_and_rebalancing_ranges


So yes, set an asset allocation, and decide when or at which threshold you will rebalance.

ie:  My Asset Allocation:
VTI 90%
EWW 10%
Rebalance via contributions as much as possible, and if allocation exceeds +/- 5%, rebalance after Q1 dividend is paid (mid April) annually, or immediately if allocation exceeds +/- 6%.

What this results in, is you buy more EWW when it's down.  And more VTI when it's down.  If EWW were to grow to 17% of your basket (and VTI only 83%), then yes - sell EWW for VTI.  But try to prevent selling/buying by contributing more to the lower one.


NorCal

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Re: Rebalancing your indices when one outperforms
« Reply #3 on: January 12, 2023, 07:38:59 PM »
It's good to have a policy on re-balancing.  I remember reading an academic paper that back-tested re-balancing strategies, and found that every 2 years is about right.

Personally, I never like the tax hit from selling winners. 

Since I'm in the accumulation phase, I just keep buying more of whatever is under-weighted in my portfolio.  I have a spreadsheet that tracks my current holdings versus my target allocation and I buy accordingly.  It's rare for my portfolio to remain out of balance for long. 

secondcor521

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Re: Rebalancing your indices when one outperforms
« Reply #4 on: January 12, 2023, 09:13:16 PM »
I would echo what @Heckler said.  The reason you're confused about what to do is that you did not decide on your asset allocation between the two indices or how and when to rebalance.  Your asset allocation is probably the bigger question, and it will depend on your risk tolerance and capacity, financial goals, other investments, assessment of the long term risk and reward of the investments if you want to remain an active investor, and so forth.

Since I'm in the accumulation phase, I just keep buying more of whatever is under-weighted in my portfolio.  I have a spreadsheet that tracks my current holdings versus my target allocation and I buy accordingly.  It's rare for my portfolio to remain out of balance for long.

This works early on.  Later, when your portfolio is large relative to your contributions, it becomes harder ... in a taxable account where there are often tax costs to rebalancing.

logjammin

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Re: Rebalancing your indices when one outperforms
« Reply #5 on: January 13, 2023, 07:40:25 AM »
REALLY great advice and comments here, thank you very much.

You're all correct about my not having put enough though into how any Mexico purchases would impact my asset allocation. Up until the EWW purchase I've just had a very, very simple allocation preference of 100% total world index for now and forever, until I may someday choose guaranteed assets as I get older. When I introduced something that by my standards was more speculative it was an error not to realize I had a new, not-yet-defined allocation preference and to not consider my future with it.

I'll be spending some time reading up on IPSs and rebalancing/reallocation. Thank you again.

Heckler

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Re: Rebalancing your indices when one outperforms
« Reply #6 on: January 13, 2023, 06:44:46 PM »
Up until the EWW purchase I've just had a very, very simple allocation preference of 100% total world index for now and forever

that's a perfectly good simple allocation, but it's not made by holding VTI. 

Did you mean VT?