Rebalancing

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?

I rebalance

Every month
5
11%
Every quarter
1
2%
Every year
26
58%
Every five years
3
7%
Never
10
22%
 
Total votes: 45

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ghariton
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Rebalancing

Post by ghariton » 29 Nov 2014 20:31

Rebalancing came up in another thread. The majority of investors rebalance from time to time, but some are opposed.

Just wondering about opinions here.

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AltaRed
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Re: Rebalancing

Post by AltaRed » 29 Nov 2014 21:05

I said every 5 years but the truth of it is that it varies depending on how out of whack my equity vs FI is, and the mix of equity/FI. Having REITs and Prefs as part of my portfolio, that rounds off the rough edges of portfolio performance and I do not get overly excited about re-balancing. Because of the income thrown off by REITs and Prefs, I do not get too excited about their price swings. Clearly not rigorous re-balancing but I wouldn't be without at least a portion of my portfolio in GICs or bonds.

Added later: Basically what Shakes does in his post directly below.
Last edited by AltaRed on 29 Nov 2014 21:29, edited 1 time in total.
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Shakespeare
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Re: Rebalancing

Post by Shakespeare » 29 Nov 2014 21:08

I sell what I need to sell for expenses, based on what's above my target allocation.

That may or may not be considered "rebalancing", but it's based on cash flow requirements, not calender dates.
“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

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Re: Rebalancing

Post by peter » 29 Nov 2014 21:13

So far I rebalance only by new contributions, which tend to be limited to 5 bulk payments to 5 different accounts early in the calendar year. So far that has been enough to rebalance between Canadian, International, Emerging, US, REIT, but that is normally much easier than between stocks and FI. I don't have liquid FI I can rebalance with (although unlike 10 years ago I have significant FI-like assets relative to the size of the stock portfolio). I think I wouldn't worry about rebalancing more frequently than yearly, probably less frequent.

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Re: Rebalancing

Post by Flaccidsteele » 29 Nov 2014 21:23

Never.

Speaking for myself, if I have been fortunate enough to acquire a good business at a fair price, I wish to hold it indefinitely. Considering that compounding over time is the single biggest contributor to my wealth in a geometric series, rebalancing makes no financial sense to, or for, me.

"To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team." - Warren Buffett

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well ... Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds." - Warren Buffett

"Visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family." - Warren Buffett
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

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Re: Rebalancing

Post by AltaRed » 29 Nov 2014 21:32

That may work for you but not many investors here have the resources of Buffett or Lynch. Suggest that to someone just getting by on a 4% SWR at age 65 and hoping to make it to 90. Monte Carlo simulations show time and again that a Black Swan event at the wrong time devastates portfolios.
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DenisD
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Re: Rebalancing

Post by DenisD » 29 Nov 2014 21:36

May rebalance whenever an asset class is 10% or more above target. Except for screens which I rebalance or partially rebalance every 6 months. Usually do some rebalancing every month.
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Re: Rebalancing

Post by Rysto » 29 Nov 2014 21:50

I make monthly contributions and try to rebalance to my target allocation with them. My portfolio is still small enough that this works well. On a yearly basis I move the accumulated money from mutual funds to ETFs and I also do a full rebalance at that point.

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Flaccidsteele
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Re: Rebalancing

Post by Flaccidsteele » 29 Nov 2014 22:11

AltaRed wrote:That may work for you but not many investors here have the resources of Buffett or Lynch.
I never had those resources either. Nor will I ever.

It is a myth that such resources are necessary to succeed without rebalancing.

The resources that are necessary are time and the appropriate indoctrination.
AltaRed wrote:Suggest that to someone just getting by on a 4% SWR at age 65 and hoping to make it to 90.
I would never suggest it to that fellow. It's too late for them. Especially if they've bought into the concept of rebalancing all the way up to the age of 65. Compounding effectively requires time using an applicable strategy. An individual needs to be inoculated early, while still relatively young.

It can't be done if there's little time and/or the individual lacks the appropriate confirmation bias.
Last edited by Flaccidsteele on 29 Nov 2014 22:27, edited 1 time in total.
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

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Re: Rebalancing

Post by chufinora » 29 Nov 2014 22:27

No option for twice a year? Although I also take a look at current asset allocation whenever buying to make sure I am not overloading any sector.

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Mike Schimek
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Re: Rebalancing

Post by Mike Schimek » 29 Nov 2014 22:43

Where's daily/weekly?

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Re: Rebalancing

Post by Dejavu » 29 Nov 2014 23:58

My challenge in rebalancing came in the crash of 2007/8. When I kept having to buy all the way down particularly with XRE. I do not wish to have to go through that again. On the upside, I did buy XRE at around $6 at the time.
My point is "its more than cutting flowers to water the weeds".
On the sell side I am mindful of the chart that shows which asset class has performed over time. I think Templeton put out the one I saw. I t challenges anyone to forecast the next hot asset class. As someone else has said you can trim your winners or the market will do it for you. Dejavu.
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Re: Rebalancing

Post by queerasmoi » 30 Nov 2014 02:23

When I do have income I have indeed used that to try and approach balance but overall I have rebalanced about annually, usually somewhere around December or January. Depending on the year it sometimes makes sense to do that before year end and sometimes after. Currently my US equities are sitting at just over 22% (allocation 20%) so I might balance sooner.

I was going to toss out some numbers to evaluate whether the rebalancing decisions I made look good in retrospect. But I realize now that it's a little difficult to track without more exhaustive examination because in many years I included these transactions in my annual shuffle of assets to fill up new TFSA room.
Flaccidsteele wrote: "To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team." - Warren Buffett
OK but the analogy falls apart if you just want to hedge your bets by trading about 5% of Michael Jordan and keeping the rest. ;)

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Re: Rebalancing

Post by LadyGeek » 30 Nov 2014 11:05

Once a year, at the end of the year. I use the opportunity to update my net worth (portfolio and other assets) and collect the information I need for the (US) Infernal Revenue Service. :twisted:
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Re: Rebalancing

Post by SQRT » 30 Nov 2014 11:19

Rebalancing usually means between equities/fixed income/cash. In that regard since my pension represents my FI component and currently is around 35% I have not been rebalancing. At some point I may Annuitize a portion of my equities to raise the FI component and free some capital up.
The more important issue for me is rebalancing within my equity component which is over concentrated in bank shares. This I do whenever the market dictates eg after the banks have run up, although it is costly from a CG perspective.

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Re: Rebalancing

Post by ig17 » 30 Nov 2014 11:39

SQRT wrote:Rebalancing usually means between equities/fixed income/cash.
Yes.

The debate about rebalancing is pointless without specifying a portfolio composition. Rebalancing makes sense if you run an asset allocation portfolio, and you believe that asset classes revert to the mean. Rebalancing makes less sense, or no sense at all, if you own a portfolio of a few individual businesses. The vocal critics of rebalancing tend to come from the latter camp. I think they miss the distinction between the two investment styles.

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Re: Rebalancing

Post by AltaRed » 30 Nov 2014 12:22

ig17 wrote:The debate about rebalancing is pointless without specifying a portfolio composition. Rebalancing makes sense if you run an asset allocation portfolio, and you believe that asset classes revert to the mean. Rebalancing makes less sense, or no sense at all, if you own a portfolio of a few individual businesses. The vocal critics of rebalancing tend to come from the latter camp. I think they miss the distinction between the two investment styles.
It is also pointless without providing the context of where one is at in their investing cycle, e.g. early on in their accumulation cycle, approaching retirement, or in retirement. The early investor can usually re-balance his/her specific portfolio composition by adding to the underbalanced components (whatever they may be) and not having to sell an outsized slice to fund an undersized slice. The retiree may, or may not, be able to re-balance by withdrawing solely from the outsized component.
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Re: Rebalancing

Post by SQRT » 30 Nov 2014 12:32

Agree with IG17 and Altared. Sometimes it seems that we want to be controversial. Eg continually restating our positions even after it is clear we have different objectives, different levels of wealth, and backgrounds. Not much flexibility of thought apparent in some of these "debates". Why don't we just agree to disagree and look for common ground instead?

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Re: Rebalancing

Post by StuBee » 30 Nov 2014 13:26

Another powerful influence on our approach to "rebalancing" is the absolute size of the portfolio. A couple living modestly with 5M$ need not approach reallocation in the same way as a similar couple (age, standard of living, etc...) with net assets of 750K$.

My own opinion is: As long as I am comfortable with the absolute dollars of FI then I do not really mind what percentage is allocated to the two major classes.

The consequence of this is that I have increased my FI allocation from 25% (ten years ago) to 35% (now). This has been accomplished largely by pumping income (mostly investment income and some personal income) into FI products. There has been no net new capital to my Canadian dividend portfolio since January 2007. I have purchased (to a lesser extent and from the same income source) some Foreign Equity.

I feel that (in current dollars) I have enough FI to last me until I am "pensionable" which is in about 10 years time. That is why I see it more as an absolute number than as a relative number. I will start spending out this FI capital in 5 weeks time...
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Re: Rebalancing

Post by DenisD » 30 Nov 2014 13:42

SQRT wrote:Why don't we just agree to disagree and look for common ground instead?
Or agree that many approaches can work. The trick is to find the one that works for me in my circumstances.

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Re: Rebalancing

Post by like_to_retire » 30 Nov 2014 14:15

None of the answers apply to me, but I would think my method of re-balancing is fairly common.

I have a retirement income portfolio of:

50% fixed income (limited to GoC bonds, Provincial bonds, GIC's in five year ladders),
20% preferreds,
25% equities = (100% CDN dividend paying commons),
05% cash.

I don't need all the income to live, so I usually plow the extra back into the fixed income and preferreds so they will grow with inflation.

Every time a GIC or bond come due (two to three times a year), I re-balance. I'm not too fussy about being exact. My spreadsheet expresses limits on the categorys of +/- 5% absolute for all except cash, and for cash the tolerance is +/- 25% relative. Those tolerances allow for a fairly large swing before I get too crazy.

ltr

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Re: Rebalancing

Post by ghariton » 30 Nov 2014 14:19

ig17 wrote:Rebalancing makes sense if you run an asset allocation portfolio, and you believe that asset classes revert to the mean.
Yes. If assets keep diverging, then rebalancing is a loser, compared to buy-and-hold.

ISTM that reversion-to-the-mean applies to broad asset classes, not to individual assets or classes of assets. Individual assets can disappear completely, as Nortel did. People who tried to "rebalance" into it, ended up catching a falling knife. Similarly, telecommunications equipment manufacturers as a whole did very badly, with most becoming insolvent. So even a class of assets, if too narrowly defined, is a bad object for rebalancing. Reversion to the mean doesn't work at that level.

On the other hand, there seems to be some evidence of reversion to the mean, if one is patient enough, for very large asset classes, such as global equities as a whole. But how about asset classes that are narrower, e.g. consumer staples? energy? natural resources? utilities? And if utilities, should I rebalance as between pipelines, telecommunications suppliers and railways? Do I think that automobiles will once again become the leading industry they once were, and so rebalance into Ford, GM, Chrysler?

Just how granular should the asset class go, for rebalancing?

How about geographic rebalancing? Currently, my VTI has done very well indeed and my VWO has done abysmally. Time to sell VTI and buy VWO? Is it reasonable to expect mean reversion, i.e. the U.S. will start doing better than China and pull ahead once again?

The other problem is that we know that, in the short term, momentum dominates reversion to the mean in financial markets. If true, wouldn't that make rebalancing a contrarian strategy in the short to medium term?

And how the heck does momentum change into mean reversion anyway? Does someone ring a bell, and all the players start running the other way?

I guess I've been spending too much time staring at Elroy Dimson's book, The Triumph of the Optimists. The only conclusion that seems firm enough to be actionable is that, over long periods of time, equities have outperformed bonds. We also know that, over the last decade or so, bonds have outperformed equities. If I take mean reversion seriously, shouldn't I expect equities to handily beat bonds going forward? And if so, shouldn't I be shifting out of bonds and into equities, just as my buy-and-hold portfolio is doing for me?

I dunno, maybe I'll just go back to throwing darts.

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Re: Rebalancing

Post by BRIAN5000 » 30 Nov 2014 15:59

I've been thinking about asset allocation and rebalancing for a while now I have lots of ideas but no good ONE yet?

Lets say a person has, 35% EQ 1 mil & 65% FI 2 mil, and for about the next 10 years has only about a $50,000 per year withdrawal requirement* from portfolio. After that withdrawals go up by inflation. Risk tolerance is maxed out at one million of equity not a percentage.

1) If the equity portion rises to 40% I was intending to try to sell some of my individual dividend stocks and buy more fixed income.
2) I was also considering equity above X amount could be sold so market fluctuations keep the equity at about 1 mil.
3) The dividends are about $3000 a month so this is a nice round number to try to keep coming in not required for spending could top up fixed income
4) Let the equity portion rise about 1% a year as I spend down fixed income so in 30 years be about a 60/40 portfolio

Lots of options almost any one will work not sure which one is best.

* Income from DB's. CPP & OAS grow on about a 5 year basis allowing for total spending in the $90-$100 per year range for a couple that keeps up with inflation for those 10 years.
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Re: Rebalancing

Post by adrian2 » 30 Nov 2014 18:35

BRIAN5000 wrote:Risk tolerance is maxed out at one million of equity not a percentage.
Let me stop you right there and ask why?
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Re: Rebalancing

Post by queerasmoi » 30 Nov 2014 19:45

ghariton wrote: On the other hand, there seems to be some evidence of reversion to the mean, if one is patient enough, for very large asset classes, such as global equities as a whole.
And the patience factor is important, in that if you explicitly rebalance too frequently you're more likely to sell repeatedly out of upward momentum or buy into downward. Whereas if you space it out enough (6 months? 1-2 years?) you're more likely to catch the market in a significantly different state from last time. And that's really the key, not necessarily expecting constant reversion to the mean, but expecting that between rebalancing periods at least one asset will have reversed direction.

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