Author Topic: Simple Rebalancing Strategy  (Read 901 times)

Triple7Stash

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Simple Rebalancing Strategy
« on: July 27, 2020, 11:42:04 AM »
Hello All,

I just wanted to check-in to make sure there are no glaring holes in my rebalancing strategy.  I am currently enrolled in a self-directed 401k/457 plan and must make all investment purchases manually.  For example, at the end of every month my 401k contributions are swept into a cash account within Schwab and then I must go-in and invest the cash in which ever investments I see fit.  I am young and quite a ways out for retirement so I am going with a simple split - 65% VTI & 35% VXUS. 

My question is... Is there any issue with purchasing up to this split every month when I make purchases? For example, next month if my investments sit at 70%VTI & 30% VXUS, I would purchase VXUS to the point at which my original 65/35 split is met.  I imagine this would remove annual rebalancing if I am continually doing this on a monthly basis.

On a side note, my only issue is that I cannot purchase fractional shares of ETFs so I have roughly <$70 that will be sitting in cash every month due not being able to buy an additional full ETF share.

Buffaloski Boris

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Re: Simple Rebalancing Strategy
« Reply #1 on: July 27, 2020, 03:18:25 PM »
It looks like what is happening is effectively monthly rebalancing. There has been research done on rebalancing. You might want to duck duck go it and do some more research. Here is a paper/ article on Michael Kitces website.

https://www.kitces.com/blog/best-opportunistic-rebalancing-frequency-time-horizons-vs-tolerance-band-thresholds/

Speaking for myself, I‘m effectively rebalancing monthly because I’m gradually changing my asset allocations. Once they get where I want them, I doubt I’ll bother more than once every 6 months or so.

MustacheAndaHalf

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Re: Simple Rebalancing Strategy
« Reply #2 on: July 28, 2020, 07:14:44 AM »
Buffaloski Boris - Taking this year as an example, markets are volatile and not monolithic.  I don't know if I've ever seen a market move only up or only down for 12 months, which are the two scenarios Michael Kitces mentions in that article.  I'd also point out that VTI and BND can be bought for $0/trade and a $0 bid-ask spread (all buying and selling happens at the same price for those large ETFs).  So there's a possibility more frequent trading could avoid costs, and capture volatility - too bad Mr Kitces wrote it off.

Triple7Stash - I think purchasing new shares to achieve your asset allocation makes a lot of sense.  Rebalancing should aim to reduce risk, so if your portfolio gets stock heavy, buying bonds helps bring the risk back to where you set it.  Note 35% bonds is very conservative - some people even retire with 60% stocks / 40% bonds.  Why did you decide on 35% bonds?

talltexan

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Re: Simple Rebalancing Strategy
« Reply #3 on: July 28, 2020, 07:29:38 AM »
I don't know how low your contributions are relative to the balance that is already in the account, but allowing rebalancing to be done simply by new contributions is absolutely fine. We used to all do it in taxable investment accounts where there were trading fees (to try to keep them low).


bacchi

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Re: Simple Rebalancing Strategy
« Reply #4 on: July 28, 2020, 09:33:20 AM »
Triple7Stash - I think purchasing new shares to achieve your asset allocation makes a lot of sense.  Rebalancing should aim to reduce risk, so if your portfolio gets stock heavy, buying bonds helps bring the risk back to where you set it.  Note 35% bonds is very conservative - some people even retire with 60% stocks / 40% bonds.  Why did you decide on 35% bonds?

Where do you read bonds?

65% VTI & 35% VXUS

That's ex-US stocks.

MustacheAndaHalf

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Re: Simple Rebalancing Strategy
« Reply #5 on: July 28, 2020, 11:35:39 AM »
Triple7Stash - I think purchasing new shares to achieve your asset allocation makes a lot of sense.  Rebalancing should aim to reduce risk, so if your portfolio gets stock heavy, buying bonds helps bring the risk back to where you set it.  Note 35% bonds is very conservative - some people even retire with 60% stocks / 40% bonds.  Why did you decide on 35% bonds?
Where do you read bonds?
65% VTI & 35% VXUS
That's ex-US stocks.
Oh I see, you're not following the convention that 65/35 means 65% stocks / 35% bonds.  I've seen that convention hundreds of times in rebalancing threads, and rarely see bonds being ignored.

Buffaloski Boris

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Re: Simple Rebalancing Strategy
« Reply #6 on: July 28, 2020, 04:37:18 PM »
Buffaloski Boris - Taking this year as an example, markets are volatile and not monolithic.  I don't know if I've ever seen a market move only up or only down for 12 months, which are the two scenarios Michael Kitces mentions in that article.  I'd also point out that VTI and BND can be bought for $0/trade and a $0 bid-ask spread (all buying and selling happens at the same price for those large ETFs).  So there's a possibility more frequent trading could avoid costs, and capture volatility - too bad Mr Kitces wrote it off.

I don’t think he wrote off more frequent trading at all. His point of view seems to be that if you’re going to rebalance, use threshold “bands” and whenever the thresholds are crossed, you trade whether it be weekly, monthly, or every few years. So long as you could program it to minimize the hassle factor, it looks like an interesting strategy.

Albatross

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Re: Simple Rebalancing Strategy
« Reply #7 on: August 01, 2020, 09:06:01 AM »
To the OP - this is what I do exactly. Every month, I buy enough to re-balance my original allocation, and if I don't have enough money to achieve that rebalance (because say one portion of my portfolio dropped massively), I simply put in all my money into that weakest part of my portfolio and forget it until next month. There are no additional costs or taxes (at least in a place like Hong Kong where I am) to doing this as compared with for example rebalancing every quarter or every year.

MustacheAndaHalf

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Re: Simple Rebalancing Strategy
« Reply #8 on: August 02, 2020, 05:18:50 AM »
Buffaloski Boris - Taking this year as an example, markets are volatile and not monolithic.  I don't know if I've ever seen a market move only up or only down for 12 months, which are the two scenarios Michael Kitces mentions in that article.  I'd also point out that VTI and BND can be bought for $0/trade and a $0 bid-ask spread (all buying and selling happens at the same price for those large ETFs).  So there's a possibility more frequent trading could avoid costs, and capture volatility - too bad Mr Kitces wrote it off.

I don’t think he wrote off more frequent trading at all. His point of view seems to be that if you’re going to rebalance, use threshold “bands” and whenever the thresholds are crossed, you trade whether it be weekly, monthly, or every few years. So long as you could program it to minimize the hassle factor, it looks like an interesting strategy.
He covers this for a couple paragraphs, ending with:

"In other words, in the short-to-intermediate term, either bull or bear market situations can produce scenarios where one investment has significant relative outperformance or underperformance that extends for months or even a year or few at a time, and rebalancing too frequently curtails the positive momentum and adds too quickly into the negative. And of course, highly frequent rebalancing can also grind down the long-term benefits of rebalancing simply due to the transaction costs."

So I'm directly refuting those few paragraphs, by pointing out that for VTI and BND, transactions costs can literally be zero (both bid-ask spread and $0/trade).  Now that many brokerages charge $0/trade for buying ETFs, I think the author's 2016 assumption that costs erode returns would need to be measured again.

It's possible he's right that momentum is more significant than rebalancing during volatility, but I don't think either one wins 100% of the time.  So it would be interesting to see a measurement - maybe showing rebalancing daily or weekly to exaggerate the effects.

DalioGold10

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Re: Simple Rebalancing Strategy
« Reply #9 on: August 02, 2020, 12:48:09 PM »

Triple7Stash

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Re: Simple Rebalancing Strategy
« Reply #10 on: August 03, 2020, 11:49:52 AM »
Thank you for all the replies. 

As Bacchi mentioned, the split is between US and non-US stocks.  I am making contributions/purchases on a monthly basis anyways, so this is just me trying to two birds one stone my rebalancing as I contribute.

For background info, I am currently ~8-10 years from FI and will have a pension supplementing my 401k/457 accounts.  I am 28 with roughly 50k in my 401k/457 accounts.

My rebalancing strategy is 5/25

https://www.whitecoatinvestor.com/rebalancing-the-525-rule/


I am not using the 5/25 rule in the article above, but I think I'd fall into this category...

"Many young accumulating investors (read, small portfolio relative to annual contributions) are usually able to rebalance using new money.  I simply direct my contributions to the asset class that is lagging.  It takes a major market movement for me to need to sell anything even using the 5/25 rule"

It would take a major market move for me to have to sell shares to rebalance.  I believe I could achieve my rebalancing needs by managing my monthly contributions and purchasing the appropriate shares.