Comments on: Rebalancing: Periodically or Based on Allocation? http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/ Index Investing: The Oblivious Investor Fri, 12 Mar 2010 02:42:18 -0600 http://wordpress.org/?v=2.9.2 hourly 1 By: FB @ FabulouslyBroke.com http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3510 FB @ FabulouslyBroke.com Sat, 17 Oct 2009 12:40:54 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3510 I am also a low key kind of person. I review (in detail) and MAYBE rebalance my assets once every year, or after a major (one-off) sort of event, such as after a recession. :) I am also a low key kind of person. I review (in detail) and MAYBE rebalance my assets once every year, or after a major (one-off) sort of event, such as after a recession. :)

]]> By: Mike http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3394 Mike Wed, 14 Oct 2009 14:11:20 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3394 TFB: Sorry, then I misunderstood your wording. And having read the paper Dylan linked to, I must admit that using bands in the 20+% range appears to lead to fewer transactions than I'd anticipated. TFB: Sorry, then I misunderstood your wording.

And having read the paper Dylan linked to, I must admit that using bands in the 20+% range appears to lead to fewer transactions than I’d anticipated.

]]> By: TFB http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3393 TFB Wed, 14 Oct 2009 13:57:45 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3393 Mike - No I didn't assume you are only checking annually. 5%/25% is very tolerant. Even if you are checking every day, the intra-year high and low still won't have you rebalance more frequently than annually. You can download S&P 500 open, close, high, low by year and test it. Mike – No I didn’t assume you are only checking annually. 5%/25% is very tolerant. Even if you are checking every day, the intra-year high and low still won’t have you rebalance more frequently than annually. You can download S&P 500 open, close, high, low by year and test it.

]]> By: Mike http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3368 Mike Tue, 13 Oct 2009 17:31:06 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3368 Heh, that too. Heh, that too.

]]> By: Dylan http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3367 Dylan Tue, 13 Oct 2009 17:30:22 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3367 <i>"Not sure whether the incremental return would be worth the additional effort, but I can see that for some people it could be."</i> ... or that it will always be there. ... or that it won't go the other way. “Not sure whether the incremental return would be worth the additional effort, but I can see that for some people it could be.”

… or that it will always be there.

… or that it won’t go the other way.

]]> By: Mike http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3366 Mike Tue, 13 Oct 2009 17:13:59 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3366 Dylan: I just read that paper. Pretty darned interesting! (And it makes sense from a logical point of view.) Not sure whether the incremental return would be worth the additional effort, but I can see that for some people it could be. Thanks for sharing it. :) Dylan: I just read that paper. Pretty darned interesting! (And it makes sense from a logical point of view.)

Not sure whether the incremental return would be worth the additional effort, but I can see that for some people it could be.

Thanks for sharing it. :)

]]> By: Dylan http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3362 Dylan Tue, 13 Oct 2009 16:08:33 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3362 The Journal of Financial Planning published a paper on "Opportunistic Rebalancing," by Gobind Daryanani CFP®, Ph.D. (January 2008), which may have some of the conclusions you're looking for, Mike. http://www.tdainstitutional.com/pdf/Opportunistic_Rebalancing_JFP2007_Daryanani.pdf @TFB - I wasn't advocating a specific strategy, just pointing out that annual vs. banding are really just different feathers from the same bird. I typically advocate either using cash flows (at the frequency at which you actually invest the money), when practical to maintain a target allocation or on an annual basis with nominal (insignificantly small) tolerance for deviation. The Journal of Financial Planning published a paper on “Opportunistic Rebalancing,” by Gobind Daryanani CFP®, Ph.D. (January 2008), which may have some of the conclusions you’re looking for, Mike.

http://www.tdainstitutional.com/pdf/Opportunistic_Rebalancing_JFP2007_Daryanani.pdf

@TFB – I wasn’t advocating a specific strategy, just pointing out that annual vs. banding are really just different feathers from the same bird.

I typically advocate either using cash flows (at the frequency at which you actually invest the money), when practical to maintain a target allocation or on an annual basis with nominal (insignificantly small) tolerance for deviation.

]]> By: Mike http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3360 Mike Tue, 13 Oct 2009 15:40:38 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3360 TFB: Not to argue with your conclusion, but doesn't it matter how frequently you're checking if you use rebalancing bands? For example, in your example, are you assuming that you're only checking annually? Because then of course annual checks + rebalancing bands means less rebalancing than simply annually. But what if you're checking monthly, weekly, or daily? (I've previously had trouble locating data on returns for periods other than calendar years, so I don't have the answer to my own question.) TFB: Not to argue with your conclusion, but doesn’t it matter how frequently you’re checking if you use rebalancing bands?

For example, in your example, are you assuming that you’re only checking annually? Because then of course annual checks + rebalancing bands means less rebalancing than simply annually.

But what if you’re checking monthly, weekly, or daily? (I’ve previously had trouble locating data on returns for periods other than calendar years, so I don’t have the answer to my own question.)

]]> By: TFB http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3357 TFB Tue, 13 Oct 2009 15:31:29 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3357 I agree with Dylan. Using a 5%/25% band will actually have you rebalance less frequently than annually, not more frequently. 5%/25% band is hard to breach. Suppose you start with 75% in stocks and 25% in bonds. In a year when stocks go down by 20% and bonds are flat, you end the year with 60 / 85 = 71% in stocks. 5%/25% band says you don't rebalance yet. Same on the up side. In a year when stocks go up by 20% and bonds are flat, you end the year with 90 / 115 = 78% in stocks. 5%/25% band once again will have you do nothing. Because stocks don't go up and down by 20% every year, if you use 5%/25% band you will not rebalance every year. I agree with Dylan. Using a 5%/25% band will actually have you rebalance less frequently than annually, not more frequently.

5%/25% band is hard to breach. Suppose you start with 75% in stocks and 25% in bonds. In a year when stocks go down by 20% and bonds are flat, you end the year with 60 / 85 = 71% in stocks. 5%/25% band says you don’t rebalance yet. Same on the up side. In a year when stocks go up by 20% and bonds are flat, you end the year with 90 / 115 = 78% in stocks. 5%/25% band once again will have you do nothing. Because stocks don’t go up and down by 20% every year, if you use 5%/25% band you will not rebalance every year.

]]> By: Rob Bennett http://www.obliviousinvestor.com/rebalancing-periodically-or-based-on-allocation/comment-page-1/#comment-3329 Rob Bennett Mon, 12 Oct 2009 15:26:49 +0000 http://www.obliviousinvestor.com/?p=5165#comment-3329 I don't believe in rebalancing. I decide on a stock allocation by comparing the long-term value proposition of stocks at a given time (determined by how stocks have performed historically at that valuation level) with the value proposition being offered by super-safe asset classes (TIPS, IBonds, and CDs). If stocks offer a likely annual return of 2 percent real per year better than the super-safe classes, I view it as sensible to take on the risks of stocks. This approach requires occasional allocation changes (once every 10 years on average), but it does not require annual rebalancing. So the transaction costs in general should be a bit less. I view rebalancing as sort of a poor man's approach to Valuation-Informed Indexing. It provides the same benefit of causing you to buy low and sell high, but far less effectively (in my view!). Rob I don’t believe in rebalancing. I decide on a stock allocation by comparing the long-term value proposition of stocks at a given time (determined by how stocks have performed historically at that valuation level) with the value proposition being offered by super-safe asset classes (TIPS, IBonds, and CDs). If stocks offer a likely annual return of 2 percent real per year better than the super-safe classes, I view it as sensible to take on the risks of stocks.

This approach requires occasional allocation changes (once every 10 years on average), but it does not require annual rebalancing. So the transaction costs in general should be a bit less. I view rebalancing as sort of a poor man’s approach to Valuation-Informed Indexing. It provides the same benefit of causing you to buy low and sell high, but far less effectively (in my view!).

Rob

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