Statistical support for event-driven rebalancing?

[electriceagle]

Does anyone know if there is statistical support for event-driven rebalancing?

I usually rebalance once a year, but the current stock market drop has me thinking of doing a rebalance. However, a rebalance in response to an event seems a bit like market timing.

Does anyone know of any studies that show the long-term effect of rebalancing after a stock market drop rather than (or in addition to) on a fixed, annual schedule?

[vand]

No, there isn't. Nobody has found any statistical support for any particular rebalancing period that dominates (if so everyone would do that), so do it whenever you like. Just make sure you keep your costs low.

[jeromedawg]

Maybe I don't have the best understanding but to me it seems like, in general, the best time to consider rebalancing at least in your taxable accounts is in conjunction with tax loss harvesting when you have losses to claim.

Otherwise, in the context of tax-advantaged/deferred accounts, I would tend to agree with vand that you can rebalance anytime you want.

[Radagast]

As Vand says, it is very hard to say to find anything consistent. Every market drop behaves differently, and the bottom comes at different times and different depths.

One good alternative is to use rebalancing bands. A popular one is 5/25, where you rebalance if any part of your allocation is off by more than 5% of your total or 25% of its target value, whichever comes first. There is no reason it has to be this band, these are all just guesses. You can backtest using bands versus periodic rebalancing at portfoliovisualizer.com, generally bands seem to do slightly better, but not always and not by much.

[TaronM]

https://seekingalpha.com/article/4093624-portfolio-rebalancing-do-you-want-to-know-secret

This article claims data supports rebalancing during a large market shift is much more important than rebalancing annually. Some pretty interesting ideas presented there, but most of it seems like too much effort for my taste as a lazy investor who typically just buys and rebalances between only 2 mutual funds (a total US stock market index and a total US bond market index). However, I was convinced by it that rebalancing from bonds to stocks now was a good idea. Guess we'll see if that's true later!

[HPstache]

Not sure.  But I just rebalanced today.  My target allocation is 60/20/20 and it got to 58/18/24 (US/Int'l/Bonds).

[jeromedawg]

Not sure.  But I just rebalanced today.  My target allocation is 60/20/20 and it got to 58/18/24 (US/Int'l/Bonds).

I wonder if I should be increasing my bonds too - I'm pretty overweight on Intl at the moment and it's freaking me out with the price drops. I just rebalanced out of a bunch of ETFs and bought a bunch of VXUS.  I have some FSPSX that I'm trying to figure out what to do with now - my goal is to get out of the mutual funds in my taxable account and into ETFs there since I think it will be slightly more tax efficient in the long run. I have a lot of FXAIX currently in my taxable but if I sell it off that'll result in a gain so I'm inclined to just hold it. Not sure if generating the gain is worth the trouble to get into ETFs with the proceeds from that, even though the amount of losses I've already harvested would more than offset the gain. I suppose it will be 'nice' to have losses to be able to write-off year over year for the next 5-10 years though lol.

[tooqk4u22]

Not sure.  But I just rebalanced today.  My target allocation is 60/20/20 and it got to 58/18/24 (US/Int'l/Bonds).

I wonder if I should be increasing my bonds too - I'm pretty overweight on Intl at the moment and it's freaking me out with the price drops. I just rebalanced out of a bunch of ETFs and bought a bunch of VXUS.  I have some FSPSX that I'm trying to figure out what to do with now - my goal is to get out of the mutual funds in my taxable account and into ETFs there since I think it will be slightly more tax efficient in the long run. I have a lot of FXAIX currently in my taxable but if I sell it off that'll result in a gain so I'm inclined to just hold it. Not sure if generating the gain is worth the trouble to get into ETFs with the proceeds from that, even though the amount of losses I've already harvested would more than offset the gain. I suppose it will be 'nice' to have losses to be able to write-off year over year for the next 5-10 years though lol.

My international allocation has been disappointing ever since I started with it......many many many years....lol  or :(.     I am not selling out of it but I am also not rebalancing into it, the issues that developed markets have had (that I thought would change do to stimulus, negative rates, etc but didn't) are going to continue to suck.....just to much structural, demographic, and political bs to ever get better.    Emerging markets will recover.   

As for bonds, base that on what your risk appetite is but normally a extremely low interest rate environment would be bad.  But things are weird right now.  Interest rates came way down but spreads and bond rates have increased.   BND is down 7% from its high.    This is due to liquidity issues as investors are moving dramatically to cash, expected increase in credit defaults, and expected increase in US Bonds as a result of $1.5Trillion stimulus package.  That's a lot to handle, on the other hand it could actually be a good time to put money into BND bc as market get better and normalize the increased spread you are taking now will offset the loss to the lower interest rates.   Effectively locking in an above market rate for the foreseeable future. 

 

[bacchi]

I also have sucky international returns but I rebalanced out of short-term US treasuries into VTSAX and VTMGX (developed markets).

I don't remember it but EM had a kick-a year in 2017 according to Callan's table of periodic returns: https://www.callan.com/wp-content/uploads/2020/01/Classic-Periodic-Table.pdf.

[BicycleB]

Not sure.  But I just rebalanced today.  My target allocation is 60/20/20 and it got to 58/18/24 (US/Int'l/Bonds).

I wonder if I should be increasing my bonds too - I'm pretty overweight on Intl at the moment and it's freaking me out with the price drops. I just rebalanced out of a bunch of ETFs and bought a bunch of VXUS.  I have some FSPSX that I'm trying to figure out what to do with now - my goal is to get out of the mutual funds in my taxable account and into ETFs there since I think it will be slightly more tax efficient in the long run. I have a lot of FXAIX currently in my taxable but if I sell it off that'll result in a gain so I'm inclined to just hold it. Not sure if generating the gain is worth the trouble to get into ETFs with the proceeds from that, even though the amount of losses I've already harvested would more than offset the gain. I suppose it will be 'nice' to have losses to be able to write-off year over year for the next 5-10 years though lol.

@jeromedawg, I think v8rx7guy SOLD bonds. Anyway, good luck with your balancing.

[CorpRaider]

Research Affiliates published something that had historical effects of valuation-based re-balancing (if memory serves).

[BicycleB]

https://seekingalpha.com/article/4093624-portfolio-rebalancing-do-you-want-to-know-secret

This article claims data supports rebalancing during a large market shift is much more important than rebalancing annually. Some pretty interesting ideas presented there, but most of it seems like too much effort for my taste as a lazy investor who typically just buys and rebalances between only 2 mutual funds (a total US stock market index and a total US bond market index). However, I was convinced by it that rebalancing from bonds to stocks now was a good idea. Guess we'll see if that's true later!

@TaronM, very thought provoking article. Thanks for posting.